FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-26719
MERCANTILE BANK CORPORATION
(Exact name of registrant as specified in its charter)
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Michigan
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38-3360865 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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310 Leonard Street NW, Grand Rapids, Michigan
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49504 |
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(Address of principal executive offices)
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(Zip Code) |
(616) 406-3000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
Common Stock
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Name of each exchange on which registered
The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate value of the common equity held by non-affiliates (persons other than directors
and executive officers) of the registrant, computed by reference to the closing price of the common
stock as of the last business day of the registrants most recently completed second fiscal
quarter, was approximately $56.2 million.
As of February 2, 2009, there were issued and outstanding 8,592,730 shares of the registrants
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2009 annual meeting of shareholders (Portions of Part III).
PART I
Item 1. Business.
The Company
Mercantile Bank Corporation is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the Bank Holding Company Act). Unless the text clearly suggests
otherwise, references to us, we, our, or the company include Mercantile Bank Corporation
and its wholly-owned subsidiaries. As a bank holding company, we are subject to regulation by the
Board of Governors of the Federal Reserve System (the Federal Reserve Board). We were organized
on July 15, 1997, under the laws of the State of Michigan, primarily for the purpose of holding all
of the stock of Mercantile Bank of Michigan (our bank), and of such other subsidiaries as we may
acquire or establish. Our bank commenced business on December 15, 1997.
Mercantile Bank Mortgage Company initiated business in October 2000 as a subsidiary of our
bank, and was reorganized as Mercantile Bank Mortgage Company, LLC (our mortgage company), on
January 1, 2004. Mercantile Insurance Center, Inc. (our insurance company), a subsidiary of our
bank, commenced operations during 2002 to offer insurance products. Mercantile Bank Real Estate
Co., L.L.C., (our real estate company), a subsidiary of our bank, was organized on July 21, 2003,
principally to develop, construct and own our facility in downtown Grand Rapids which serves as our
banks main office and Mercantile Bank Corporations headquarters. Mercantile Bank Capital Trust I
(the Mercantile trust), a business trust subsidiary, was formed in September 2004 to issue trust
preferred securities.
To date we have raised capital from our initial public offering of common stock in October
1997, a public offering of common stock in July 1998, three private placements of common stock
during 2001, a public offering of common stock in August 2001 and a public offering of common stock
in September 2003. In addition, we raised capital through a public offering of $16.0 million of
trust preferred securities in 1999, which was refinanced as part of a $32.0 million private
placement of trust preferred securities in 2004. Our expenses have generally been paid using the
proceeds of the capital sales and dividends from our bank. Our principal source of future
operating funds is expected to be dividends from our bank.
We filed an election to become a financial holding company, pursuant to the Bank Holding
Company Act, as amended by Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve
Board regulations, which election became effective March 23, 2000.
Our Bank
Our bank is a state banking company that operates under the laws of the State of Michigan,
pursuant to a charter issued by the Michigan Office of Financial and Insurance Regulation. Our
banks deposits are insured to the maximum extent permitted by law by the Federal Deposit Insurance
Corporation (FDIC). Our banks primary service area is the Kent and Ottawa County areas of West
Michigan, which includes the City of Grand Rapids, the second largest city in the State of
Michigan. In addition, our bank opened new offices in the cities of East Lansing and Ann Arbor,
Michigan, during 2005, and in Novi, Michigan, during 2007.
Our bank, through its nine offices, provides commercial and retail banking services primarily
to small- to medium-sized businesses based in and around the Grand Rapids, Holland, Lansing, Ann
Arbor and Oakland County areas. These offices consist of a main office located at 310 Leonard
Street NW, Grand Rapids, Michigan, a combination branch and retail loan center located at 4613
Alpine Avenue NW, Comstock Park, Michigan, a combination branch and operations center located at
5610 Byron Center Avenue SW, Wyoming, Michigan, and branches located at 4860 Broadmoor Avenue SE,
Kentwood, Michigan, 3156 Knapp Street NE, Grand Rapids, Michigan, 880 East 16th Street,
Holland, Michigan, 3737 Coolidge Road, East Lansing, Michigan, 325 Eisenhower Parkway, Ann Arbor,
Michigan, and 28350 Cabot Drive, Novi, Michigan.
2.
Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans,
and accepts checking, savings and time deposits. Our bank owns seven automated teller machines
(ATM), located at our branch locations in Grand Rapids, Holland and East Lansing, that
participate in the MAC, NYCE and PLUS regional network systems, as well as other ATM networks
throughout the country. Our bank also
enables customers to conduct certain loan and deposit transactions by telephone and personal
computer. Courier service is provided to certain commercial customers, and safe deposit facilities
are available at our branch locations in Grand Rapids, Holland and East Lansing. Our bank does not
have trust powers. In December 2001, our bank entered into a joint brokerage services and
marketing agreement with Raymond James Financial Services, Inc. to make available to its customers
financial planning, retail brokerage, equity research, insurance and annuities, retirement
planning, trust services and estate planning. The joint brokerage services and marketing agreement
was terminated during the first quarter 2009.
Our Mortgage Company
Our mortgage companys predecessor, Mercantile Bank Mortgage Company, commenced operations on
October 24, 2000, when our bank contributed most of its residential mortgage loan portfolio and
participation interests in certain commercial mortgage loans to Mercantile Bank Mortgage Company.
On the same date, our bank also transferred its residential mortgage origination function to
Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was
reorganized as Mercantile Bank Mortgage Company, LLC, a limited liability company, which is 99%
owned by our bank and 1% owned by our insurance company. The reorganization had no impact on the
companys financial position or results of operations. Mortgage loans originated and held by our
mortgage company are serviced by our bank pursuant to a servicing agreement.
Our Insurance Company
Our insurance company acquired an existing shelf insurance agency effective April 15, 2002.
An Agency and Institution Agreement was entered into among our insurance company, our bank and Hub
International for the purpose of providing programs of mass marketed personal lines of insurance.
Insurance product offerings include private passenger automobile, homeowners, personal inland
marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business and
life insurance products, all of which are provided by and written through companies that have
appointed Hub International as their agent.
Our Real Estate Company
Our real estate company was organized on July 21, 2003, principally to develop, construct and
own our facility in downtown Grand Rapids that serves as our banks main office and Mercantile Bank
Corporations headquarters. This facility was placed into service during the second quarter of
2005. Our real estate company is 99% owned by our bank and 1% owned by our insurance company.
The Mercantile Trust
In 2004, we formed the Mercantile trust, a Delaware business trust. Mercantile trusts
business and affairs are conducted by its property trustee, a Delaware trust company, and three
individual administrative trustees who are employees and officers of the company. Mercantile trust
was established for the purpose of issuing and selling its Series A and Series B trust preferred
securities and common securities, and used the proceeds from the sales of those securities to
acquire Series A and Series B Floating Rate Notes issued by the company. Substantially all of the
net proceeds received by the company from the Series A transaction were used to redeem the trust
preferred securities that had been issued by MBWM Capital Trust I in September 1999. We
established MBWM Capital Trust I in 1999 to issue the trust preferred securities that were
redeemed. Substantially all of the net proceeds received by the company from the Series B
transaction were contributed to our bank as capital. The Series A and Series B Floating Rate Notes
are categorized on our consolidated financial statements as subordinated debentures. Additional
information regarding Mercantile trust is incorporated by reference to Note 17 Subordinated
Debentures and Note 18 Regulatory Matters of the Notes to Consolidated Financial Statements
included in this Annual Report.
3.
Effect of Government Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies
of the United States government, its agencies, and the Federal Reserve Board. The Federal Reserve
Boards monetary policies have had, and will likely continue to have, an important impact on the
operating results of commercial banks through its power to implement national monetary policy in
order to, among other things, curb inflation, maintain employment, and mitigate economic
recessions. The policies of the Federal Reserve
Board have a major effect upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities, and through its regulation of, among
other things, the discount rate on borrowings of member banks and the reserve requirements against
member bank deposits. Our bank maintains reserves directly with the Federal Reserve Bank of
Chicago to the extent required by law. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
Regulation and Supervision
As a bank holding company under the Bank Holding Company Act, we are required to file an
annual report with the Federal Reserve Board and such additional information as the Federal Reserve
Board may require. We are also subject to examination by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding companies that have not
qualified as financial holding companies to banking and the management of banking organizations,
and to certain non-banking activities. These non-banking activities include those activities that
the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the
Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking.
These non-banking activities include, among other things: operating a mortgage company, finance
company, or factoring company; performing certain data processing operations; providing certain
investment and financial advice; acting as an insurance agent for certain types of credit-related
insurance; leasing property on a full-payout, nonoperating basis; and providing discount securities
brokerage services for customers. With the exception of the activities of our mortgage company
discussed above, neither we nor any of our subsidiaries engages in any of the non-banking
activities listed above.
In March 2000, our election to become a financial holding company, as permitted by the Bank
Holding Company Act, as amended by Title I of the Gramm-Leach-Bliley Act, was accepted by the
Federal Reserve Board. In order to continue as a financial holding company, we and our bank must
satisfy statutory requirements regarding capitalization, management, and compliance with the
Community Reinvestment Act. As a financial holding company, we are permitted to engage in a
broader range of activities than are permitted to bank holding companies.
Those expanded activities include any activity which the Federal Reserve Board (in certain
instances in consultation with the Department of the Treasury) determines, by order or regulation,
to be financial in nature or incidental to such financial activity, or to be complementary to a
financial activity and not to pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. Such expanded activities include, among others:
insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death,
or issuing annuities, and acting as principal, agent, or broker for such purposes; providing
financial, investment, or economic advisory services, including advising a mutual fund; and
underwriting, dealing in, or making a market in securities. Other than the insurance agency
activities of our insurance company, neither we nor our subsidiaries presently engage in any of the
expanded activities.
Our bank is subject to restrictions imposed by federal law and regulation. Among other
things, these restrictions apply to any extension of credit to us or to our other subsidiaries, to
investments in stock or other securities that we issue, to the taking of such stock or securities
as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales
of certain types of assets to, us or our other subsidiaries. Federal law restricts our ability to
borrow from our bank by limiting the aggregate amount we may borrow and by requiring that all loans
to us be secured in designated amounts by specified forms of collateral.
4.
With respect to the acquisition of banking organizations, we are generally required to obtain
the prior approval of the Federal Reserve Board before we can acquire all or substantially all of
the assets of any bank, or acquire ownership or control of any voting shares of any bank or bank
holding company, if, after the acquisition, we would own or control more than 5% of the voting
shares of the bank or bank holding company. Acquisitions of banking organizations across state
lines are subject to restrictions imposed by Federal and state laws and regulations.
Employees
As of December 31, 2008, we and our bank employed 269 full-time and 71 part-time persons.
Management believes that relations with employees are good.
Lending Policy
As a routine part of our business, we make loans and leases to businesses and individuals
located within our market areas. Our lending policy states that the function of the lending
operation is twofold: to provide a means for the investment of funds at a profitable rate of return
with an acceptable degree of risk, and to meet the credit needs of the creditworthy businesses and
individuals who are our customers. We recognize that in the normal business of lending, some
losses on loans and leases will be inevitable and should be considered a part of the normal cost of
doing business.
Our lending policy anticipates that priorities in extending loans and leases will be modified
from time to time as interest rates, market conditions and competitive factors change. The policy
sets forth guidelines on a nondiscriminatory basis for lending in accordance with applicable laws
and regulations. The policy describes various criteria for granting loans and leases, including
the ability to pay; the character of the customer; evidence of financial responsibility; purpose of
the loan or lease; knowledge of collateral and its value; terms of repayment; source of repayment;
payment history; and economic conditions.
The lending policy further limits the amount of funds that may be loaned or leased against
specified types of real estate collateral. For certain loans secured by real estate, the policy
requires an appraisal of the property offered as collateral by a state certified independent
appraiser. The policy also provides general guidelines for loan to value and lease to value limits
for other types of collateral, such as accounts receivable and machinery and equipment. In
addition, the policy provides general guidelines as to environmental analysis, loans to employees,
executive officers and directors, problem loan and lease identification, maintenance of an
allowance for loan and lease losses, loan and lease review and grading, mortgage and consumer
lending, and other matters relating to our lending practices.
The Board of Directors has delegated significant lending authority to officers of our bank.
The Board of Directors believes this empowerment, supported by our strong credit culture and the
significant experience of our commercial lending staff, makes us responsive to our customers. The
loan policy currently specifies lending authority for certain officers up to $5.0 million, and
$10.0 million for our banks Chairman of the Board and Chief Executive Officer; however, the $10.0
million lending authority is generally used only in rare circumstances where timing is of the
essence. Generally, loan requests exceeding $2.5 million require approval by the Officers Loan
Committee, and loan requests exceeding $4.0 million, up to the legal lending limit of approximately
$33.6 million, require approval by the Board of Directors. In most circumstances, we apply an
in-house lending limit that is significantly less than our banks legal lending limit.
Lending Activity
Commercial Loans. Our commercial lending group originates commercial loans and leases
primarily in our market areas. Our commercial lenders have extensive commercial lending
experience, with most having at least ten years experience. Loans and leases are originated for
general business purposes, including working capital, accounts receivable financing, machinery and
equipment acquisition, and commercial real estate financing, including new construction and land
development.
5.
Working capital loans are often structured as a line of credit and are reviewed periodically
in connection with the borrowers year-end financial reporting. These loans are generally secured
by substantially all of the assets of the borrower, and have an interest rate tied to the
Mercantile Prime Rate. Loans and leases for machinery and equipment purposes typically have a
maturity of three to five years and are fully amortizing, while commercial real estate loans are
usually written with a five-year maturity and amortize over a 15 to 20 year period. Commercial
loans and leases typically have an interest rate that is fixed to maturity or is tied to the
Mercantile Prime Rate.
We evaluate many aspects of a commercial loan or lease transaction in order to minimize credit
and interest rate risk. Underwriting includes an assessment of the management, products, markets,
cash flow, capital, income and collateral. This analysis includes a review of the borrowers
historical and projected financial results. Appraisals are generally required by certified
independent appraisers where real estate is the primary collateral, and in some cases, where
equipment is the primary collateral. In certain situations, for creditworthy customers, we may
accept title reports instead of requiring lenders policies of title insurance.
Commercial real estate lending involves more risk than residential lending because loan
balances are greater and repayment is dependent upon the borrowers business operations. We
attempt to minimize the risks associated with these transactions by generally limiting our
commercial real estate lending to owner-operated properties of well-known customers or new
customers whose businesses have an established profitable history. In many cases, risk is further
reduced by limiting the amount of credit to any one borrower to an amount considerably less than
our legal lending limit and avoiding certain types of commercial real estate financings.
We have no material foreign loans, and no material loans to energy producing customers. We
have only limited exposure to companies engaged in agricultural-related activities.
Single-Family Residential Real Estate Loans. Our mortgage company originates single-family
residential real estate loans in our market area, usually according to secondary market
underwriting standards. Loans not conforming to those standards are made in limited circumstances.
Single-family residential real estate loans provide borrowers with a fixed or adjustable interest
rate with terms up to 30 years.
Our bank has a home equity line of credit program. Home equity credit is generally secured by
either a first or second mortgage on the borrowers primary residence. The program provides
revolving credit at a rate tied to the Wall Street Journal Prime Rate.
Consumer Loans. We originate consumer loans for a variety of personal financial needs,
including new and used automobiles, boat loans, credit cards and overdraft protection for our
checking account customers. Consumer loans generally have shorter terms and higher interest rates
and usually involve more credit risk than single-family residential real estate loans because of
the type and nature of the collateral.
We believe our consumer loans are underwritten carefully, with a strong emphasis on the amount
of the down payment, credit quality, employment stability and monthly income of the borrower.
These loans are generally repaid on a monthly repayment schedule with the source of repayment tied
to the borrowers periodic income. In addition, consumer lending collections are dependent on the
borrowers continuing financial stability, and are thus likely to be adversely affected by job
loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral.
We believe that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans, and that consumer loans are important to our
efforts to serve the credit needs of the communities and customers that we serve.
6.
Loan and Lease Portfolio Quality
We utilize a comprehensive grading system for our commercial loans and leases as well as
residential mortgage and consumer loans. All commercial loans and leases are graded on a ten grade
rating system. The rating system utilizes standardized grade paradigms that analyze several
critical factors such as cash flow, management and collateral coverage. All commercial loans and
leases are graded at inception and reviewed at various intervals thereafter. Residential mortgage
and consumer loans are graded on a random sampling basis after the loan has been made using a
separate standardized grade paradigm that analyzes several critical factors such as debt-to-income
and credit and employment histories.
Our independent loan and lease review program is primarily responsible for the administration
of the grading system and ensuring adherence to established lending policies and procedures. The
loan and lease review program is an integral part of maintaining our strong asset quality culture.
The loan and lease review function works closely with senior management, although it functionally
reports to the Board of Directors. All commercial loan and lease relationships equal to or
exceeding $1.8 million are formally reviewed every twelve months, with a random sampling performed
on credits under $1.8 million. Our watch list credits are reviewed monthly by our Watch List
Committee, which is comprised of personnel from the administration, lending and loan and lease
review functions.
Loans and leases are placed in a nonaccrual status when, in our opinion, uncertainty exists as
to the ultimate collection of principal and interest. As of December 31, 2008, loans and leases
placed in nonaccrual status totaled $47.9 million, or 2.58% of total loans and leases. As of the
same date, loans and leases past due 90 days or more and still accruing interest totaled $1.4
million, or 0.07% of total loans and leases.
Additional detail and information relative to the loan and lease portfolio is incorporated by
reference to Managements Discussion and Analysis of Financial Condition and Results of Operation
(Managements Discussion and Analysis) and Note 3 of the Consolidated Financial Statements in
this Annual Report.
Allowance for Loan and Lease Losses
In each accounting period, we adjust the allowance for loan and lease losses (allowance) to
the amount we believe is necessary to maintain the allowance at adequate levels. Through the loan
and lease review and credit departments, we attempt to allocate specific portions of the allowance
based on specifically identifiable problem loans and leases. The evaluation of the allowance is
further based on, but not limited to, consideration of the internally prepared Reserve Analysis,
composition of the loan and lease portfolio, third party analysis of the loan and lease
administration processes and portfolio and general economic conditions. In addition, the
historical strong commercial loan and lease growth and expansions into new markets are taken into
account.
The Reserve Analysis, used since our inception and completed monthly, applies reserve
allocation factors to outstanding loan and lease balances to calculate an overall allowance dollar
amount. For commercial loans and leases, which continue to comprise the vast majority of our total
loans and leases, reserve allocation factors are based upon the loan ratings as determined by our
standardized grade paradigms. For retail loans, reserve allocation factors are based upon the type
of credit. Adjustments for specific lending relationships, including impaired loans and leases,
are made on a case-by-case basis. The reserve allocation factors are primarily based on the recent
levels and historical trends of net loan charge-offs and non-performing assets, the comparison of
the recent levels and historical trends of net loan charge-offs and non-performing assets with a
customized peer group consisting of ten similarly-sized publicly traded banking organizations
conducting business in the states of Michigan, Illinois, Indiana or Ohio, the review and
consideration of our loan and lease migration analysis and the experience of senior management
making similar loans and leases for an extensive period of time. We regularly review the Reserve
Analysis and make adjustments periodically based upon identifiable trends and experience.
We believe that the present allowance is adequate, based on the broad range of considerations
listed above.
7.
The primary risks associated with commercial loans and leases are the financial condition of
the borrower, the sufficiency of collateral, and lack of timely payment. We have a policy of
requesting and reviewing periodic financial statements from our commercial loan and lease
customers, and periodically reviewing existence of collateral and its value. The primary risk
element that we consider for consumer and residential real estate loans is lack of timely payment.
We have a reporting system that monitors past due loans and have adopted policies to pursue our
creditors rights in order to preserve our banks collateral position.
Additional detail regarding the allowance is incorporated by reference to Managements
Discussion and Analysis and Note 3 of the Notes to Consolidated Financial Statements of the Company
included in this Annual Report.
Although we believe the allowance is adequate to absorb probable incurred losses as they
arise, there can be no assurance that we will not sustain losses in any given period which could be
substantial in relation to, or greater than, the size of the allowance.
Investments
Bank Holding Company Investments. The principal investments of our bank holding company are
the investments in the common stock of our bank and the common securities of Mercantile trust.
Other funds of our bank holding company may be invested from time to time in various debt
instruments.
As a bank holding company, we are also permitted to make portfolio investments in equity
securities and to make equity investments in subsidiaries engaged in a variety of non-banking
activities, which include real estate-related activities such as community development, real estate
appraisals, arranging equity financing for commercial real estate, and owning and operating real
estate used substantially by our bank or acquired for its future use. In addition, our bank
holding companys qualification as a financial holding company enables us to make equity
investments in companies engaged in a broader range of financial activities than we could do
without that qualification. Such expanded activities include insuring, guaranteeing, or
indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and
acting as principal, agent, or broker for such purposes; providing financial, investment, or
economic advisory services, including advising a mutual fund; and underwriting, dealing in, or
making a market in securities. Our bank holding company has no plans at this time to make directly
any of these equity investments at the bank holding company level. Our Board of Directors may,
however, alter the investment policy at any time without shareholder approval.
In addition, so long as our bank holding company is qualified as a financial holding company,
it would be permitted, as part of the business of underwriting or merchant banking activity and
under certain circumstances and procedures, to invest in shares or other ownership interests in, or
assets of, companies engaged in non-financial activities. In order to make those investments, our
bank holding company would be required (i) to become, or to have an affiliate that is, a registered
securities broker or dealer or a registered municipal securities dealer, or (ii) to control both an
insurance company predominantly engaged in underwriting life, accident and health, or property and
casualty insurance (other than credit insurance) or issuing annuities, and a registered investment
adviser that furnishes investment advice to an insurance company. We do not currently have any
securities, insurance, or investment advisory affiliates of the required types, nor does our bank
holding company have any current plans to make any of the equity investments described in this
paragraph.
8.
Our Banks Investments. Our bank may invest its funds in a wide variety of debt instruments
and may participate in the federal funds market with other depository institutions. Subject to
certain exceptions, our bank is prohibited from investing in equity securities. Among the equity
investments permitted for our bank under various conditions and subject in some instances to amount
limitations, are shares of a subsidiary insurance agency, mortgage company, real estate company, or
Michigan business and industrial development company, such as our insurance company, our mortgage
company, or our real estate company. Under another such exception, in certain circumstances and
with prior notice to or approval of the FDIC, our bank could invest up to 10% of its total assets
in the equity securities of a subsidiary corporation engaged in the acquisition and development of
real property for sale, or the improvement of real property by construction or rehabilitation of
residential or commercial units for sale or lease. Our bank has no present plans to make such an
investment. Real estate acquired by our bank in satisfaction of or foreclosure upon loans may be
held by our bank for specified periods. Our bank is also permitted to invest in such real estate
as is necessary for the convenient transaction of its business. Our banks Board of Directors may
alter the banks investment policy without shareholder approval at any time.
Additional detail and information relative to the securities portfolio is incorporated by
reference to Managements Discussion and Analysis and Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.
Competition
Our primary markets for loans and core deposits are the Grand Rapids, Holland, Lansing, Ann
Arbor and Oakland County metropolitan areas. We face substantial competition in all phases of our
operations from a variety of different competitors. We compete for deposits, loans and other
financial services with numerous
Michigan-based and out-of-state banks, savings banks, thrifts, credit unions and other financial
institutions as well as from other entities that provide financial services. Some of the financial
institutions and financial service organizations with which we compete are not subject to the same
degree of regulation as we are. Many of our primary competitors have been in business for many
years, have established customer bases, are larger, have substantially higher lending limits than
we do, and offer larger branch networks and other services which we do not. Most of these same
entities have greater capital resources than we do, which, among other things, may allow them to
price their services at levels more favorable to the customer and to provide larger credit
facilities than we do. Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies may acquire banks
and other financial institutions. The Gramm-Leach-Bliley Act affects the competitive environment
in which we conduct our business. The financial services industry is also likely to become more
competitive as further technological advances enable more companies to provide financial services.
Selected Statistical Information
Managements Discussion and Analysis beginning on Page F-4 in this Annual Report includes
selected statistical information.
Return on Equity and Assets
Return on Equity and Asset information is included in Managements Discussion and Analysis
beginning on Page F-4 in this Annual Report.
Available Information
We maintain an internet website at www.mercbank.com. We make available on or through our
website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We do not intend the address of our website to be an active link or to otherwise incorporate the
contents of our website into this Annual Report.
9.
Item 1A. Risk Factors.
The following risk factors could affect our business, financial condition or results of
operations. These risk factors should be considered in connection with evaluating the
forward-looking statements contained in this Annual Report because they could cause the actual
results and conditions to differ materially from those projected in forward-looking statements.
Before you buy our common stock, you should know that investing in our common stock involves risks,
including the risks described below. The risks that are highlighted here are not the only ones we
face. If the adverse matters referred to in any of the risks actually occur, our business,
financial condition or operations could be adversely affected. In that case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
Difficult market conditions have adversely affected our industry.
Dramatic declines in the housing market over the past two years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of real estate related loans and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-backed securities but spreading to
other securities and loans, have caused many financial institutions to seek additional capital, to
reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases,
to fail. Reflecting concern about the stability of the financial markets generally and the
strength of counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This market turmoil and
tightening of credit have led to an increased level of commercial and consumer delinquencies, lack
of consumer confidence, increased market volatility and widespread reduction of business activity
generally. The resulting economic pressure on consumers and lack of confidence in the financial
markets has adversely affected our business, financial condition and results of operations. Market
developments may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which may impact our charge-offs
and provision for credit losses. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market conditions on
us and others in the financial institutions industry.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than
12 months. In more recent months, the volatility and disruption have reached unprecedented levels.
In some cases, the markets have produced downward pressure on stock prices and credit availability
for certain issuers without apparent regard to those issuers underlying financial strength. The
current levels of market disruption and volatility have an adverse effect, which may be material,
on our ability to access capital and on our business, financial condition and results of
operations.
Adverse changes in economic conditions or interest rates may negatively affect our earnings,
capital and liquidity.
The results of operations for financial institutions, including our bank, may be materially
and adversely affected by changes in prevailing local and national economic conditions, including
declines in real estate market values and the related declines in value of our real estate
collateral, rapid increases or decreases in interest rates and changes in the monetary and fiscal
policies of the federal government. Our profitability is heavily influenced by the spread between
the interest rates we earn on loans and investments and the interest rates we pay on deposits and
other interest-bearing liabilities. Substantially all of our loans are to businesses and
individuals in western, south central, or southeastern Michigan, and the decline in the economy of
these areas has adversely affected us. Additional stresses on our financial condition are likely
given the deteriorated economic conditions within our markets. Like most banking institutions, our
net interest spread and margin will be affected by general economic conditions and other factors
that influence market interest rates and our ability to respond to changes in these rates. At any given time, our assets and liabilities
may be such that they will be affected differently by a given change in interest rates.
10.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the
actions and commercial soundness of other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty or other relationships. We have
exposure to many different industries and counterparties, and we routinely execute transactions
with counterparties in the financial industry. As a result, defaults by, or even rumors or
questions about, one or more financial services institutions, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or
by other institutions. Even routine funding transactions expose us to credit risk in the event of
default of our counterparty or client. In addition, our credit risk may be exacerbated when the
collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover
the full amount of the financial instrument exposure due us. There is no assurance that any such
losses would not materially and adversely affect our results of operations.
There can be no assurance that recently enacted legislation will stabilize the U.S. financial
system.
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of
2008 (the EESA). The legislation was the result of a proposal by Treasury Secretary Henry Paulson
to the U.S. Congress in response to the financial crisis affecting the banking system, financial
markets, and other financial institutions. Among other things, the EESA established the Troubled
Asset Relief Program, or TARP. Under TARP, the U.S. Treasury was given the authority, among other
things, to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions and others for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Treasury
announced a program under the EESA pursuant to which it would make senior preferred stock
investments in qualifying financial institutions (the TARP Capital Purchase Program). Also on
October 14, 2008, the Federal Deposit Insurance Corporation announced the development of a
guarantee program under the systemic risk exception to the Federal Deposit Insurance Act pursuant
to which the FDIC would, among other things, offer a guarantee of certain financial institution
indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing financial
institutions (the FDIC Temporary Liquidity Guarantee Program). On February 17, 2009, President
Obama signed into law the American Recovery and Reinvestment Act of 2009 (the ARRA), a further
package of economic stimulus measures. In addition, Treasury Secretary Geithner has announced
further measures to address the crisis in the financial services sector. There can be no
assurance, however, as to the actual impact that the EESA, the ARRA, their respective implementing
regulations, the programs of the FDIC or any other governmental agency, or any further legislation,
will have on the financial markets. The failure to stabilize the financial markets, and a
continuation or worsening of current financial market conditions, could materially and adversely
affect our business, financial condition, results of operations, access to credit or the trading
price of our common stock.
The impact on us of recently enacted legislation, in particular the Emergency Economic
Stabilization Act of 2008 and its implementing regulations, and actions by the FDIC, cannot be
predicted at this time.
The programs established or to be established under the EESA and TARP or other legislation may
have adverse effects upon us. We may face increased regulation of our industry. Compliance with
such regulation may increase our costs and limit our ability to pursue business opportunities.
Also, participation in specific programs may subject us to additional restrictions. For example,
participation in the TARP Capital Purchase Program would limit (without the consent of the U.S.
Treasury) our ability to increase our dividend or to repurchase our common stock for so long as any
securities issued by us under such program remained outstanding. It would also subject us to
additional executive compensation restrictions. The effects of participating or not participating
in any such programs, and the extent of our participation in such programs, cannot reliably be
determined at this time.
11.
Our credit losses could increase and our allowance for loan and lease losses may not be adequate to
cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, when it
occurs, may have a materially adverse effect on our earnings and overall financial condition as
well as the value of our common stock. Our focus on commercial lending may result in a larger
concentration of loans to small businesses. As a result, we may assume different or greater
lending risks than other banks. We make various assumptions and judgments about the collectibility
of our loan portfolio and provide an allowance for losses based on several factors. If our
assumptions are wrong, our allowance for loan and lease losses may not be sufficient to cover our
losses, which would have an adverse effect on our operating results. The actual amounts of future
provisions for loan and lease losses cannot be determined at this time and may exceed the amounts
of past provisions. Additions to our allowance for loan and lease losses decrease our net income.
We rely heavily on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
We are and will continue to be dependent upon the services of our management team, including
Michael H. Price, Chairman of the Board, President and Chief Executive Officer, and our other
senior managers. The loss of Mr. Price, or any of our other senior managers, could have an adverse
effect on our growth and performance. We have entered into employment contracts with Mr. Price and
two other executive officers. The contracts provide for a three year employment period that is
extended for an additional year each year unless a notice is given indicating that the contract
will not be extended.
In addition, we continue to depend on our city and regional presidents and key commercial loan
officers. Our city and regional presidents and several of our commercial loan officers are
responsible, or share responsibility, for generating and managing a significant portion of our
commercial loan and lease portfolio. Our success can be attributed in large part to the
relationships these officers as well as members of our management team have developed and are able
to maintain with our customers as we continue to implement our community banking philosophy. The
loss of any of these commercial loan officers could adversely affect our loan and lease portfolio
and performance, and our ability to generate new loans and leases. Many of our key employees have
signed agreements with us agreeing not to compete with us in one or more of our markets for
specified time periods if they leave employment with us.
Some of the other financial institutions in our markets also require their key employees to
sign agreements that preclude or limit their ability to leave their employment and compete with
them or solicit their customers. These agreements make it more difficult for us to hire loan
officers with experience in our markets who can immediately solicit their former or new customers
on our behalf.
Decline in the availability of out-of-area deposits could cause liquidity or interest rate margin
concerns, or limit our growth.
We have utilized and expect to continue to utilize out-of-area or wholesale deposits to
support our asset growth. These deposits are generally a lower cost source of funds when compared
to the interest rates that we would have to offer in our local markets to generate a commensurate
level of funds. In addition, the overhead costs associated with wholesale deposits are
considerably less than the overhead costs we would incur to obtain and administer a similar level
of local deposits. A decline in the availability of these wholesale deposits would require us to
fund our growth with more costly funding sources, which could reduce our net interest margin, limit
our growth, reduce our asset size, or increase our overhead costs. Wholesale deposits include
deposits obtained through brokers. If a bank is not well capitalized, regulatory approval is
required to accept brokered deposits.
12.
Future sales of our common stock or other securities may dilute the value of our common stock.
In many situations, our Board of Directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued preferred or common stock, including
shares authorized and unissued under our Stock Incentive Plan of 2006. In the future, we may issue
additional securities, through public or private offerings, in order to raise additional capital.
Any such issuance would dilute the percentage of ownership interest of existing shareholders and
may dilute the per share book value of the common stock. In addition, option holders under our
stock-based incentive plans may exercise their options at a time when we would otherwise be able to
obtain additional equity capital on more favorable terms.
Our growth and expansion may be limited by many factors.
Our primary growth strategy has been to grow internally by increasing our business in the
western Michigan area, and more recently in the Lansing, Ann Arbor and Oakland County areas of
Michigan. We are also considering other areas in which we may expand our business. This internal
growth strategy depends in large part on generating an increasing level of loans and deposits at
acceptable risk and interest rate levels without commensurate increases in non-interest expenses.
There can be no assurance that we will be successful in continuing our growth strategy due to
delays and other impediments resulting from regulatory oversight, limited availability of qualified
personnel and favorable and cost effective branch sites, and management time, capital, and expenses
required to develop new branch sites and markets. In addition, the success of our growth strategy
will depend on maintaining sufficient regulatory capital levels and on adequate economic conditions
in our market areas.
In addition, although we have no current plans to do so, we may acquire banks, related
businesses or branches of other financial institutions that we believe provide a strategic fit with
our business. To the extent that we grow through acquisitions, we cannot assure you that we will
be able to adequately or profitably manage this growth. Acquiring other banks, businesses, or
branches involves risks commonly associated with acquisitions, including exposure to unknown or
contingent liabilities and asset quality issues, difficulty and expense of integrating the
operations and personnel, potential disruption to our business including the diversion of
managements time and attention, and the possible loss of key employees and customers.
Our future success is dependent on our ability to compete effectively in the highly competitive
banking industry.
We face substantial competition in all phases of our operations from a variety of different
competitors. Our future growth and success will depend on our ability to compete effectively in
this highly competitive environment. We compete for deposits, loans and other financial services
with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial
institutions as well as other entities that provide financial services, including securities firms
and mutual funds. Some of the financial institutions and financial service organizations with
which we compete are not subject to the same degree of regulation as we are. Most of our
competitors have been in business for many years, have established customer bases, are larger, have
substantially higher lending limits than we do and offer branch networks and other services which
we do not, including trust and international banking services. Most of these entities have greater
capital and other resources than we do, which, among other things, may allow them to price their
services at levels more favorable to the customer and to provide larger credit facilities than we
do. This competition may limit our growth or earnings. Under the Gramm-Leach-Bliley Act of 1999,
effective March 11, 2000, securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
affects the competitive environment in which we conduct business. The financial services industry
is also likely to become more competitive as further technological advances enable more companies
to provide financial services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of funds between
parties.
13.
We are subject to significant government regulation, and any regulatory changes may adversely
affect us.
The banking industry is heavily regulated under both federal and state law. These regulations
are primarily intended to protect customers, not our creditors or shareholders. Existing state and
federal banking laws subject us to substantial limitations with respect to the making of loans, the
purchase of securities, the payment of dividends and many other aspects of our business. Some of
these laws may benefit us, others may increase our costs of doing business, or otherwise adversely
affect us and create competitive advantages for others. Regulations affecting banks and financial
services companies undergo continuous change, and we cannot predict the ultimate effect of these
changes, which could have a material adverse effect on our profitability or financial condition.
Federal economic and monetary policy may also affect our ability to attract deposits, make loans
and achieve satisfactory interest spreads.
We continually encounter technological change, and we may have fewer resources than our competitors
to continue to invest in technological improvements.
The banking industry is undergoing technological changes with frequent introductions of new
technology-driven products and services. In addition to better serving customers, the effective
use of technology increases efficiency and enables financial institutions to reduce costs. Our
future success will depend, in part, on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands for convenience as
well as create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. There can be no assurance
that we will be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
Our Articles of Incorporation and By-laws and the laws of Michigan contain provisions that may
discourage or prevent a takeover of our company and reduce any takeover premium.
Our Articles of Incorporation and By-laws, and the corporate laws of the State of Michigan,
include provisions which are designed to provide our Board of Directors with time to consider
whether a hostile takeover offer is in our and our shareholders best interest. These provisions,
however, could discourage potential acquisition proposals and could delay or prevent a change in
control. The provisions also could diminish the opportunities for a holder of our common stock to
participate in tender offers, including tender offers at a price above the then-current market
price for our common stock. These provisions could also prevent transactions in which our
shareholders might otherwise receive a premium for their shares over then-current market prices,
and may limit the ability of our shareholders to approve transactions that they may deem to be in
their best interests.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and
prohibit or discourage various types of hostile takeover activities. In addition to these
provisions and the provisions of our Articles of Incorporation and Bylaws, federal law requires the
Federal Reserve Boards approval prior to acquiring control of a bank holding company. All of
these provisions may delay or prevent a change in control without action by our shareholders and
could adversely affect the price of our common stock.
There is a limited trading market for our common stock.
The price of our common stock has been, and will likely continue to be, subject to
fluctuations based on, among other things, economic and market conditions for bank holding
companies and the stock market in general, as well as changes in investor perceptions of our
company. The issuance of new shares of our common stock also may affect the market for our common
stock.
14.
Our common stock is traded on the Nasdaq Global Select Market under the symbol MBWM. The
development and maintenance of an active public trading market depends upon the existence of
willing buyers and sellers, the presence of which is beyond our control. While we are a
publicly-traded company, the volume of trading activity in our stock is still relatively limited.
Even if a more active market develops, there can be no assurance that such a market will continue,
or that our shareholders will be able to sell their shares at or above the offering price.
We have paid a quarterly cash dividend each quarter beginning with the first quarter of 2003.
While we expect to continue paying cash dividends, there is no assurance that we will continue to
do so.
Our business is subject to operational risks.
We, like most financial institutions, are exposed to many types of operational risks,
including the risk of fraud by employees or outsiders, unauthorized transactions by employees or
operational errors. Operational errors may include clerical or record keeping errors or those
resulting from faulty or disabled computer or telecommunications systems. Given our volume of
transactions, certain errors may be repeated or compounded before they are discovered and
successfully corrected. Our necessary dependence upon automated systems to record and process our
transaction volume may further increase the risk that technical system flaws or employee tampering
or manipulation of those systems will result in losses that are difficult to detect.
We may also be subject to disruptions of our operating systems arising from events that are
wholly or partially beyond our control, including, for example, computer viruses or electrical or
telecommunications outages, which may give rise to losses in service to customers and to loss or
liability to us. We are further exposed to the risk that our external vendors may be unable to
fulfill their contractual obligations to us, or will be subject to the same risk of fraud or
operational errors by their respective employees as are we, and to the risk that our or our
vendors business continuity and data security systems prove not to be sufficiently adequate. We
also face the risk that the design of our controls and procedures prove inadequate or are
circumvented, causing delays in detection or errors in information. Although we maintain a system
of controls designed to keep operational risk at appropriate levels, there can be no assurance that
we will not suffer losses from operational risks in the future that may be material in amount.
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the staff
of the Securities and Exchange Commission that were issued 180 days or more before the end of our
2008 fiscal year and that remain unresolved.
Item 2. Properties.
During 2005, our bank placed into service a new four-story facility located approximately two
miles north from the center of downtown Grand Rapids. This facility serves as our headquarters and
our banks main office, and houses the administration function, our banks commercial lending and
review function, our banks loan operations function, a full service branch, and portions of our
banks retail lending and business development function. The facility consists of approximately
55,000 square feet of usable space and contains multiple drive-through lanes with ample parking.
The land and building are owned by our real estate company. The address of this facility is 310
Leonard Street NW, Grand Rapids, Michigan.
Our bank designed and constructed a full service branch and retail loan facility which opened
in July of 1999 in Alpine Township, a northwest suburb of Grand Rapids. The facility is one story
and has approximately 8,000 square feet of usable space. The land and building are owned by our
bank. The facility has multiple drive-through lanes and ample parking space. The address of this
facility is 4613 Alpine Avenue NW, Comstock Park, Michigan.
15.
During 2001, our bank designed and constructed two facilities on a 4-acre parcel of land
located in the City of Wyoming, a southwest suburb of Grand Rapids. The land had been purchased by
our bank in 2000. The larger of the two buildings is a full service branch and deposit operations
facility which opened in September of 2001. The facility is two-stories and has approximately
25,000 square feet of usable space. The facility has multiple drive-through lanes and ample
parking space. The address of this facility is 5610 Byron Center Avenue SW, Wyoming, Michigan.
The other building is a single-story facility with approximately 11,000 square feet of usable
space. Our banks accounting, audit, loss prevention and wire transfer functions are housed in
this building, which underwent a renovation in 2005 that almost doubled its size. The address of
this facility is 5650 Byron Center Avenue SW, Wyoming, Michigan.
During 2002, our bank designed and constructed a full service branch which opened in December
of 2002 in the City of Kentwood, a southeast suburb of Grand Rapids. The land had been purchased
by our bank in 2001. The facility is one story and has approximately 10,000 square feet of usable
space. The facility has multiple drive-through lanes and ample parking space. The address of this
facility is 4860 Broadmoor Avenue SW, Kentwood, Michigan.
During 2003, our bank designed and constructed a full service branch in the northeast quadrant
of the City of Grand Rapids. The land had been purchased by our bank in 2002. The facility is one
story and has approximately 3,500 square feet of usable space. The facility has multiple
drive-through lanes and ample parking space. The address of this facility is 3156 Knapp Street NE,
Grand Rapids, Michigan.
During 2003, our bank designed and started construction of a new two-story facility located in
Holland, Michigan. This facility, which was completed during the fourth quarter of 2004, serves as
a full service banking center for the Holland area, including commercial lending, retail lending
and a full service branch. The facility, which is owned by our bank, consists of approximately
30,000 square feet of usable space and contains multiple drive-through lanes with ample parking.
The address of this facility is 880 East 16th Street, Holland, Michigan.
During 2005, our bank opened a branch facility in the City of Ann Arbor, Michigan. The
facility is one story and has approximately 10,000 square feet of usable space. The facility is
operated under a lease agreement between our bank and a third party, and serves as a full service
banking center for the Ann Arbor area, including commercial lending, retail lending and a full
service branch. There is ample parking space, but no drive-through lanes. The address of this
facility is 325 Eisenhower Parkway, Ann Arbor, Michigan.
During 2006, our bank purchased approximately 3 acres of vacant land and designed and
initiated construction of a new three-story facility in East Lansing, Michigan. This facility was
completed during the second quarter of 2007, and serves as a full service banking center for the
greater Lansing area, including commercial lending, retail lending, and a full service branch. The
facility consists of approximately 27,000 square feet of usable space and contains multiple
drive-through lanes with ample parking. The address of this facility is 3737 Coolidge Road, East
Lansing, Michigan.
During 2007, our bank opened a branch facility in the City of Novi, Michigan. The facility is
one story and has approximately 8,600 square feet of usable space. The facility is operated under
a lease agreement between our bank and a third party, and serves as a full service banking center
for the Oakland County area, including commercial lending, retail lending and a full service
branch. There is ample parking space, but no drive-through lanes. The address of this facility is
28350 Cabot Road, Novi, Michigan.
Item 3. Legal Proceedings.
From time to time, we may be involved in various legal proceedings that are incidental to our
business. In the opinion of management, we are not a party to any legal proceedings that are
material to our financial condition, either individually or in the aggregate.
16.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock is traded on the Nasdaq Global Select Market under the symbol MBWM. At
February 10, 2009, there were 393 record holders of our common stock. In addition, we estimate
that there were approximately 4,000 beneficial owners of our common stock who own their shares
through brokers or banks.
The following table shows the high and low sales prices for our common stock as reported by
the Nasdaq Global Select Market for the periods indicated and the quarterly cash dividends paid by
us during those periods. Applicable prices have been adjusted for the 5% stock dividend paid on
May 4, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
Dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.19 |
|
|
$ |
10.19 |
|
|
$ |
0.15 |
|
Second Quarter |
|
|
11.40 |
|
|
|
7.10 |
|
|
|
0.08 |
|
Third Quarter |
|
|
10.09 |
|
|
|
4.82 |
|
|
|
0.04 |
|
Fourth Quarter |
|
|
9.69 |
|
|
|
4.00 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
36.62 |
|
|
$ |
29.30 |
|
|
$ |
0.13 |
|
Second Quarter |
|
|
31.43 |
|
|
|
26.59 |
|
|
|
0.14 |
|
Third Quarter |
|
|
27.40 |
|
|
|
19.86 |
|
|
|
0.14 |
|
Fourth Quarter |
|
|
22.70 |
|
|
|
14.49 |
|
|
|
0.14 |
|
Holders of our common stock are entitled to receive dividends that the Board of Directors may
declare from time to time. We may only pay dividends out of funds that are legally available for
that purpose. We are a holding company and substantially all of our assets are held by our
subsidiaries. Our ability to pay dividends to our shareholders depends primarily on our banks
ability to pay dividends to us. Dividend payments and extensions of credit to us from our bank are
subject to legal and regulatory limitations, generally based on capital levels and current and
retained earnings, imposed by law and regulatory agencies with authority over our bank. The
ability of our bank to pay dividends is also subject to its profitability, financial condition,
capital expenditures and other cash flow requirements. In addition, under the terms of our
subordinated debentures, we would be precluded from paying dividends on our common stock if an
event of default has occurred and is continuing under the subordinated debentures, or if we
exercised our right to defer payments of interest on the subordinated debentures, until the
deferral ended.
On January 8, 2009, we declared a $0.04 per share cash dividend on our common stock, payable
on March 10, 2009 to record holders as of February 10, 2009. We currently expect to continue to
pay a quarterly cash dividend, although there can be no assurance that we will continue to do so.
Issuer Purchases of Equity Securities
We did not purchase any shares of our common stock during the fourth quarter of 2008.
17.
Shareholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total
shareholder return on our common stock (based on the last reported sales price of the respective
year) with the cumulative total return of the Nasdaq Composite Index and the SNL Nasdaq Bank Index
from December 31, 2003 through December 31, 2008. The following is based on an investment of $100
on December 31, 2003 in our common stock, the Nasdaq Composite Index and the SNL Nasdaq Bank Index,
with dividends reinvested where applicable.
|
|
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|
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|
|
|
|
|
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|
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|
Period Ending |
Index |
|
12/31/03 |
|
12/31/04 |
|
12/31/05 |
|
12/31/06 |
|
12/31/07 |
|
12/31/08 |
|
Mercantile Bank Corporation |
|
|
100.00 |
|
|
|
114.78 |
|
|
|
118.66 |
|
|
|
123.62 |
|
|
|
54.67 |
|
|
|
15.60 |
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
108.59 |
|
|
|
110.08 |
|
|
|
120.56 |
|
|
|
132.39 |
|
|
|
78.72 |
|
SNL Bank NASDAQ |
|
|
100.00 |
|
|
|
114.61 |
|
|
|
111.12 |
|
|
|
124.75 |
|
|
|
97.94 |
|
|
|
71.13 |
|
Item 6. Selected Financial Data.
The Selected Financial Data on page F-3 in this Annual Report is incorporated here by
reference.
18.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.
Managements Discussion and Analysis included in this Annual Report is incorporated here by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information under the heading Market Risk Analysis included in this Annual Report is
incorporated here by reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, Notes to Consolidated Financial Statements and the
Reports of Independent Registered Public Accounting Firm included in this Annual Report are
incorporated here by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
As of December 31, 2008, an evaluation was performed under the supervision of and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on that evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as of December 31,
2008.
There have been no significant changes in our internal controls over financial reporting
during the quarter ended December 31, 2008, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). There are inherent
limitations in the effectiveness of any system of internal control. Accordingly, even an effective
system of internal control can provide only reasonable assurance with respect to financial
statement preparation.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2008. This evaluation was based
on criteria for effective internal control over financial reporting described in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the
framework in Internal Control Integrated Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2008. Refer to page F-32 for managements report.
Our independent registered public accounting firm has issued an audit report on our internal
control over financial reporting which is included in this Annual Report.
Item 9B. Other Information.
None
19.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information presented under the captions Election of Directors, Executive Officers,
Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance Code of
Ethics in the definitive Proxy Statement of Mercantile for our April 23, 2009 Annual Meeting of
Shareholders (the Proxy Statement), a copy of which will be filed with the Securities and
Exchange Commission before the meeting date, is incorporated here by reference.
We have a separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee
consist of Betty S. Burton, David M. Cassard, David M. Hecht, Calvin D. Murdock, Merle J. Prins and
Timothy O. Schad. The Board of Directors has determined that Messrs. Cassard, Murdock and Schad,
members of the Audit Committee, are qualified as audit committee financial experts, as that term is
defined in the rules of the Securities and Exchange Commission. Messrs. Cassard, Murdock and Schad
are independent, as independence for audit committee members is defined in the Nasdaq listing
standards and the rules of the Securities and Exchange Commission.
Item 11. Executive Compensation.
The information presented under the captions Executive Compensation, Corporate Governance
Compensation Committee Interlocks and Insider Participation and Compensation Committee Report
in the Proxy Statement is incorporated here by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information presented under the caption Stock Ownership of Certain Beneficial Owners and
Management in the Proxy Statement is incorporated here by reference.
20.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2008, relating to compensation
plans under which equity securities are authorized for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
Number of securities to |
|
Weighted average |
|
equity compensation |
|
|
be issued upon exercise |
|
exercise price of |
|
plans (excluding |
|
|
of outstanding options, |
|
outstanding options, |
|
securities reflected in |
Plan Category |
|
warrants and rights |
|
warrants and rights |
|
column (a)) |
|
|
(a) |
|
(b) |
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by
security holders
(1) |
|
|
325,434 |
|
|
$ |
20.49 |
|
|
|
396,000 |
(2) |
Equity compensation
plans not approved
by security holders |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total |
|
|
325,434 |
|
|
$ |
20.49 |
|
|
|
396,000 |
|
|
|
|
(1) |
|
These plans are Mercantiles 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan,
2004 Employee Stock Option Plan, Independent Director Stock Option Plan and the Stock Incentive
Plan of 2006. |
|
(2) |
|
These securities are available under the Stock Incentive Plan of 2006. Incentive awards may
include, but are not limited to, stock options, restricted stock, stock appreciation rights and
stock awards. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information presented under the captions Transactions with Related Persons and
Corporate Governance Director Independence in the Proxy Statement is incorporated here by
reference.
Item 14. Principal Accountant Fees and Services.
The information presented under the caption Principal Accountant Fees and Services in the
Proxy Statement is incorporated here by reference.
21.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements. The following financial statements and reports of independent
registered public accounting firms of Mercantile Bank Corporation and its subsidiaries are filed as
part of this report:
|
|
|
Report of Independent Registered Public Accounting Firm dated March 11, 2009 BDO
Seidman, LLP |
|
|
|
|
Report of Independent Registered Public Accounting Firm dated February 20, 2007 Crowe
Horwath LLP |
|
|
|
|
Consolidated Balance Sheets - December 31, 2008 and 2007 |
|
|
|
|
Consolidated Statements of Income for each of the three years in the period ended December
31, 2008 |
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity for each of the three years in
the period ended December 31, 2008 |
|
|
|
|
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2008 |
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
The consolidated financial statements, the notes to the consolidated financial statements,
and the reports of independent registered public accounting firm listed above are
incorporated by reference in Item 8 of this report. |
|
|
(2) |
|
Financial Statement Schedules |
|
|
|
|
Not applicable |
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
3.1
|
|
Our Articles of Incorporation are incorporated by reference to
exhibit 3.1 of our Form 10-Q for the quarter ended June 30,
2008 |
|
|
|
3.2
|
|
Our Amended and Restated Bylaws dated as of January 16, 2003
are incorporated by reference to exhibit 3.2 of our
Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 2003 |
|
|
|
10.1
|
|
Our 1997 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Registration Statement on Form
SB-2 (Commission File No. 333-33081) that became effective on
October 23, 1997 * |
|
|
|
10.2
|
|
Our 2000 Employee Stock Option Plan is incorporated by
reference to exhibit 10.14 of our Form 10-K for the year ended
December 31, 2000 * |
|
|
|
10.3
|
|
Our 2004 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 10-Q for the quarter
ended September 30, 2004 * |
22.
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
10.4
|
|
Form of Stock Option Agreement for options under the 2004
Employee Stock Option Plan is incorporated by reference to
exhibit 10.2 of our Form 10-Q for the quarter ended September
30, 2004 * |
|
|
|
10.5
|
|
Our Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.26 of our Form 10-K for the year ended
December 31, 2002 * |
|
|
|
10.6
|
|
Form of Stock Option Agreement for options under the
Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 8-K filed October 22,
2004 * |
|
|
|
10.7
|
|
Mercantile Bank of Michigan Amended and Restated Deferred
Compensation Plan for Members of the Board of Directors dated
June 29, 2006 is incorporated by reference to exhibit 10.9 of
our Form 10-K for the year ended December 31, 2007 |
|
|
|
10.8
|
|
First Amendment dated October 25, 2007 to the Mercantile Bank
of Michigan Amended and Restated Deferred Compensation Plan for
Members of the Board of Directors dated June 29, 2006 is
incorporated by reference to exhibit 10.10 of our Form 10-K for
the year ended December 31, 2007 |
|
|
|
10.9
|
|
Second Amendment dated October 23, 2008 to the Mercantile Bank
of Michigan Amended and Restated Deferred Compensation Plan for
Members of the Board of Directors dated June 29, 2007 |
|
|
|
10.10
|
|
Agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23, 1997 |
|
|
|
10.11
|
|
Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated May 12, 2000 extending the
agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.15 of our Form 10-K for the year ended December 31, 2000 |
|
|
|
10.12
|
|
Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated November 21, 2002 extending
the agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.5 of our Form 10-K for the year ended December 31, 2002 |
|
|
|
10.13
|
|
Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated December 20, 2006 extending
the agreements between Fiserv Solutions, Inc. and our bank
dated September 10, 1997 and November 21, 2002 is incorporated
by reference to exhibit 10.14 of our Form 10-K for the year
ended December 31, 2007 |
|
|
|
10.14
|
|
Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Gerald R. Johnson,
Jr., is incorporated by reference to exhibit 10.21 of our Form
10-K for the year ended December 31, 2001 * |
23.
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
10.15
|
|
Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K for
the year ended December 31, 2001 * |
|
|
|
10.16
|
|
Employment Agreement dated as of October 18, 2001, among the
company, our bank and Robert B. Kaminski, Jr., is incorporated
by reference to exhibit 10.23 of our Form 10-K for the year
ended December 31, 2001 * |
|
|
|
10.17
|
|
Employment Agreement dated as of October 18, 2001, among the
company, our bank and Charles E. Christmas, is incorporated by
reference to exhibit 10.23 of our Form 10-K for the year ended
December 31, 2001 * |
|
|
|
10.18
|
|
Amendment to Employment Agreement dated as of October 17, 2002,
among the company, our bank and Gerald R. Johnson, Jr., is
incorporated by reference to exhibit 10.21 of our Form 10-K for
the year ended December 31, 2002 * |
|
|
|
10.19
|
|
Amendment to Employment Agreement dated as of October 17, 2002,
among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K for
the year ended December 31, 2002 * |
|
|
|
10.20
|
|
Amendment to Employment Agreement dated as of October 17, 2002,
among the company, our bank and Robert B. Kaminski, Jr., is
incorporated by reference to exhibit 10.23 of our Form 10-K for
the year ended December 31, 2002 * |
|
|
|
10.21
|
|
Amendment to Employment Agreement dated as of October 17, 2002,
among the company, our bank and Charles E. Christmas, is
incorporated by reference to exhibit 10.24 of our Form 10-K for
the year ended December 31, 2002 * |
|
|
|
10.22
|
|
Amendment to Employment Agreement dated as of October 28, 2004,
among the company, our bank and Robert B. Kaminski, Jr., is
incorporated by reference to exhibit 10.21 of our Form 10-K for
the year ended December 31, 2004 * |
|
|
|
10.23
|
|
Junior Subordinated Indenture between us and Wilmington Trust
Company dated September 16, 2004 providing for the issuance of
the Series A and Series B Floating Rate Junior Subordinated
Notes due 2034 is incorporated by reference to exhibit 10.1 of
our Form 8-K filed December 15, 2004 |
|
|
|
10.24
|
|
Amended and Restated Trust Agreement dated September 16, 2004
for Mercantile Bank Capital Trust I is incorporated by
reference to exhibit 10.2 of our Form 8-K filed December 15,
2004 |
|
|
|
10.25
|
|
Placement Agreement between us, Mercantile Bank Capital Trust
I, and SunTrust Capital Markets, Inc. dated September 16, 2004
is incorporated by reference to exhibit 10.3 of our Form 8-K
filed December 15, 2004 |
|
|
|
10.26
|
|
Guarantee Agreement dated September 16, 2004 between Mercantile
as Guarantor and Wilmington Trust Company as Guarantee Trustee
is incorporated by reference to exhibit 10.4 of our Form 8-K
filed December 15, 2004 |
|
|
|
10.27
|
|
Form of Agreement Amending Stock Option Agreement, dated
November 17, 2005 issued under our 2004 Employee Stock Option
Plan, is incorporated by reference to exhibit 10.1 of our Form
8-K filed December 14, 2005 * |
24.
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
10.28
|
|
Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Gerald R. Johnson,
Jr. is incorporated by reference to exhibit 10.28 of our Form
10-K for the year ended December 31, 2005 * |
|
|
|
10.29
|
|
Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Michael H. Price is
incorporated by reference to exhibit 10.29 of our Form 10-K for
the year ended December 31, 2005 * |
|
|
|
10.30
|
|
Third Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Robert B. Kaminski,
Jr. is incorporated by reference to exhibit 10.30 of our Form
10-K for the year ended December 31, 2005 * |
|
|
|
10.31
|
|
Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Charles E. Christmas
is incorporated by reference to exhibit 10.31 of our Form 10-K
for the year ended December 31, 2005 * |
|
|
|
10.32
|
|
Form of Mercantile Bank of Michigan Amended and Restated
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski,
Jr., Charles E. Christmas, and certain other officers of our
bank is incorporated by reference to exhibit 10.34 of our Form
10-K for the year ended December 31, 2007 * |
|
|
|
10.33
|
|
Form of First Amendment to the Mercantile Bank of Michigan
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski,
Jr., Charles E. Christmas, and certain other officers of our
bank, dated October 25, 2007 is incorporated by reference to
exhibit 10.35 of our Form 10-K for the year ended December 31,
2007 * |
|
|
|
10.34
|
|
Form of Second Amendment to the Mercantile Bank of Michigan
Executive Deferred Compensation Agreement date November 18,
2006, that has been entered into between our bank and each of
Michael H. Price, Robert B. Kaminski, Charles E. Christmas, and
certain other officers of our bank, dated October 23, 2008 * |
|
|
|
10.35
|
|
Form of Mercantile Bank of Michigan Split Dollar Agreement that
has been entered into between our bank and each of Gerald R.
Johnson, Jr., Michael H. Price, Robert B. Kaminski, Jr.,
Charles E. Christmas, and certain other officers of our bank is
incorporated by reference to exhibit 10.33 of our Form 10-K for
the year ended December 31, 2005 * |
|
|
|
10.36
|
|
Director Fee Summary * |
|
|
|
10.37
|
|
Lease Agreement between our bank and The Conlin Company dated
July 12, 2005 for our Ann Arbor, Michigan office is
incorporated by reference to exhibit 10.36 of our Form 10-K for
the year ended December 31, 2005 |
|
|
|
10.38
|
|
Stock Incentive Plan of 2006 is incorporated by reference to
Appendix A of our proxy statement for our April 27, 2006 annual
meeting of shareholders that was filed with the Securities and
Exchange Commission * |
25.
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
10.39
|
|
Amendment and Restatement of Stock Incentive Plan of 2006 dated
November 18, 2008 * |
|
|
|
10.40
|
|
Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted in 2006
under our Stock Incentive Plan of 2006 is incorporated by
reference to exhibit 10.1 of our Form 8-K filed November 22,
2006 * |
|
|
|
10.41
|
|
Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted after 2006
under our Stock Incentive Plan of 2006 is incorporated by
reference to exhibit 10.41 of our Form 10-K for the year ended
December 31, 2007 * |
|
|
|
10.42
|
|
Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock granted
in 2006 under our Stock Incentive Plan of 2006 is incorporated
by reference to exhibit 10.2 of our Form 8-K filed November 22,
2006 * |
|
|
|
10.43
|
|
Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock granted
after 2006 under our Stock Incentive Plan of 2006 is
incorporated by reference to exhibit 10.43 of our Form 10-K for
the year ended December 31, 2007 * |
|
|
|
10.44
|
|
Executive Officer Bonus Plan for 2007 is incorporated by
reference to exhibit 10.1 of our Form 8-K filed January 29,
2007 * |
|
|
|
10.45
|
|
Retirement Agreement by and among Mercantile Bank Corporation,
Mercantile Bank of Michigan and Gerald R. Johnson, Jr. is
incorporated by reference to exhibit 10.1 of our Form 8-K filed
May 25, 2007 * |
|
|
|
10.46
|
|
Additional Release of Claims Pursuant to Retirement Agreement
Dated May 24, 2007 by and among Mercantile Bank Corporation,
Mercantile Bank of Michigan and Gerald R. Johnson, Jr. is
incorporated by reference to exhibit 10.1 of our Form 10-Q for
the quarter ended September 30, 2007 * |
|
|
|
10.47
|
|
Mercantile Bank Corporation Employee Stock Purchase Plan of 2002 |
|
|
|
10.48
|
|
Lease Agreement between our bank and CD Partners LLC dated
October 2, 2007 for our Oakland County, Michigan office is
incorporated by reference to exhibit 10.47 of our Form 10-K for
the year ended December 31, 2007 |
|
|
|
21
|
|
Subsidiaries of the company |
|
|
|
23.1
|
|
Consent of BDO Seidman, LLP |
|
|
|
23.2
|
|
Consent of Crowe Horwath LLP |
|
|
|
31
|
|
Rule 13a-14(a) Certifications |
|
|
|
32.1
|
|
Section 1350 Chief Executive Officer Certification |
|
|
|
32.2
|
|
Section 1350 Chief Financial Officer Certification |
26.
|
|
|
* |
|
Management contract or compensatory plan |
(c) |
|
Financial Statements Not Included In Annual Report |
|
|
|
Not applicable |
27.
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2008 and 2007
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2008 and 2007
CONTENTS
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-29 |
|
|
|
|
|
|
|
|
|
F-32 |
|
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
F-33 |
|
|
|
|
|
|
|
|
|
F-34 |
|
|
|
|
|
|
|
|
|
F-35 |
|
|
|
|
|
|
|
|
|
F-37 |
|
|
|
|
|
|
|
|
|
F-39 |
|
F-2
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands except per share data) |
|
Consolidated Results of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
121,072 |
|
|
$ |
144,181 |
|
|
$ |
137,260 |
|
|
$ |
102,130 |
|
|
$ |
69,022 |
|
Interest expense |
|
|
74,863 |
|
|
|
88,624 |
|
|
|
75,673 |
|
|
|
46,838 |
|
|
|
26,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
46,209 |
|
|
|
55,557 |
|
|
|
61,587 |
|
|
|
55,292 |
|
|
|
42,427 |
|
Provision for loan and lease losses |
|
|
21,200 |
|
|
|
11,070 |
|
|
|
5,775 |
|
|
|
3,790 |
|
|
|
4,674 |
|
Noninterest income |
|
|
7,282 |
|
|
|
5,870 |
|
|
|
5,261 |
|
|
|
5,661 |
|
|
|
4,302 |
|
Noninterest expense |
|
|
42,126 |
|
|
|
38,356 |
|
|
|
32,262 |
|
|
|
31,117 |
|
|
|
23,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
|
|
(9,835 |
) |
|
|
12,001 |
|
|
|
28,811 |
|
|
|
26,046 |
|
|
|
18,857 |
|
Income tax expense (benefit) |
|
|
(4,876 |
) |
|
|
3,035 |
|
|
|
8,964 |
|
|
|
8,145 |
|
|
|
5,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959 |
) |
|
$ |
8,966 |
|
|
$ |
19,847 |
|
|
$ |
17,901 |
|
|
$ |
13,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,208,010 |
|
|
$ |
2,121,403 |
|
|
$ |
2,067,268 |
|
|
$ |
1,838,210 |
|
|
$ |
1,536,119 |
|
Cash and cash equivalents |
|
|
25,804 |
|
|
|
29,430 |
|
|
|
51,380 |
|
|
|
36,753 |
|
|
|
20,811 |
|
Securities |
|
|
242,787 |
|
|
|
211,736 |
|
|
|
202,419 |
|
|
|
181,614 |
|
|
|
152,965 |
|
Loans and leases, net of deferred fees |
|
|
1,856,915 |
|
|
|
1,799,880 |
|
|
|
1,745,478 |
|
|
|
1,561,812 |
|
|
|
1,317,124 |
|
Allowance for loan and lease losses |
|
|
27,108 |
|
|
|
25,814 |
|
|
|
21,411 |
|
|
|
20,527 |
|
|
|
17,819 |
|
Bank owned life insurance policies |
|
|
42,462 |
|
|
|
39,118 |
|
|
|
30,858 |
|
|
|
28,071 |
|
|
|
23,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,599,575 |
|
|
|
1,591,181 |
|
|
|
1,646,903 |
|
|
|
1,419,352 |
|
|
|
1,159,181 |
|
Securities sold under agreements to repurchase |
|
|
94,413 |
|
|
|
97,465 |
|
|
|
85,472 |
|
|
|
72,201 |
|
|
|
56,317 |
|
Federal Home Loan Bank advances |
|
|
270,000 |
|
|
|
180,000 |
|
|
|
95,000 |
|
|
|
130,000 |
|
|
|
120,000 |
|
Subordinated debentures |
|
|
32,990 |
|
|
|
32,990 |
|
|
|
32,990 |
|
|
|
32,990 |
|
|
|
32,990 |
|
Shareholders equity |
|
|
174,372 |
|
|
|
178,155 |
|
|
|
171,915 |
|
|
|
155,125 |
|
|
|
141,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(0.23 |
)% |
|
|
0.43 |
% |
|
|
1.01 |
% |
|
|
1.05 |
% |
|
|
0.99 |
% |
Return on average shareholders equity |
|
|
(2.87 |
)% |
|
|
5.10 |
% |
|
|
12.19 |
% |
|
|
12.05 |
% |
|
|
10.16 |
% |
Average shareholders equity to average assets |
|
|
8.01 |
% |
|
|
8.44 |
% |
|
|
8.31 |
% |
|
|
8.73 |
% |
|
|
9.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total loans and leases |
|
|
2.66 |
% |
|
|
1.66 |
% |
|
|
0.49 |
% |
|
|
0.26 |
% |
|
|
0.22 |
% |
Allowance for loan and lease losses to total loans and leases |
|
|
1.46 |
% |
|
|
1.43 |
% |
|
|
1.23 |
% |
|
|
1.31 |
% |
|
|
1.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage capital |
|
|
9.17 |
% |
|
|
9.97 |
% |
|
|
10.04 |
% |
|
|
10.45 |
% |
|
|
11.53 |
% |
Tier 1 leverage risk-based capital |
|
|
9.68 |
% |
|
|
10.14 |
% |
|
|
10.37 |
% |
|
|
10.82 |
% |
|
|
11.82 |
% |
Total risk-based capital |
|
|
10.93 |
% |
|
|
11.39 |
% |
|
|
11.45 |
% |
|
|
12.00 |
% |
|
|
13.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.59 |
) |
|
$ |
1.06 |
|
|
$ |
2.36 |
|
|
$ |
2.14 |
|
|
$ |
1.65 |
|
Diluted |
|
|
(0.59 |
) |
|
|
1.06 |
|
|
|
2.33 |
|
|
|
2.10 |
|
|
|
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value at end of period |
|
|
20.29 |
|
|
|
20.89 |
|
|
|
21.43 |
|
|
|
19.46 |
|
|
|
17.78 |
|
Dividends declared |
|
|
0.31 |
|
|
|
0.55 |
|
|
|
0.48 |
|
|
|
0.39 |
|
|
|
0.30 |
|
Dividend payout ratio |
|
NA |
|
|
|
52.16 |
% |
|
|
20.34 |
% |
|
|
17.79 |
% |
|
|
18.60 |
% |
F-3
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion and other portions of this Annual Report contain forward-looking
statements that are based on managements beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about our company. Words such
as anticipates, believes, estimates, expects, forecasts, intends, is likely, plans,
projects, and variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions (Future Factors) that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in such forward-looking
statements. We undertake no obligation to update, amend, or clarify forward-looking statements,
whether as a result of new information, future events (whether anticipated or unanticipated), or
otherwise.
Future Factors include changes in interest rates and interest rate relationships; demand for
products and services; the degree of competition by traditional and non-traditional competitors;
changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the
impact of technological advances; governmental and regulatory policy changes; the outcomes of
contingencies; trends in customer behavior as well as their ability to repay loans; changes in
local real estate values; changes in the national and local economies; and other risk factors
described in Item 1A of this Annual Report. These are representative of the Future Factors that
could cause a difference between an ultimate actual outcome and a preceding forward-looking
statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations is based on
Mercantile Bank Corporations consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are
particularly susceptible to significant change in the near term relate to the determination of the
allowance for loan and lease losses and income tax accounting, and actual results could differ from
those estimates. Management has reviewed the analyses with the Audit Committee of our Board of
Directors.
Allowance For Loan and Lease Losses: The allowance for loan and lease losses (allowance)
is maintained at a level we believe is adequate to absorb probable incurred losses identified and
inherent in the loan and lease portfolio. Our evaluation of the adequacy of the allowance is an
estimate based on past loan loss experience, the nature and volume of the loan and lease portfolio,
information about specific borrower situations and estimated collateral values and assessments of
the impact of current and anticipated economic conditions on the loan and lease portfolio.
Allocations of the allowance may be made for specific loans or leases, but the entire allowance is
available for any loan or lease that, in managements judgment, should be charged-off. Loan and
lease losses are charged against the allowance when management believes the uncollectibility of a
loan or lease is likely. The balance of the allowance represents managements best estimate, but
significant downturns in circumstances relating to loan and lease quality or economic conditions
could result in a requirement for an increased allowance in the future. Likewise, an upturn in
loan and lease quality or improved economic conditions may result in a decline in the required
allowance in the future. In either instance, unanticipated changes could have a significant impact
on operating earnings.
F-4
The allowance is increased through a provision charged to operating expense. Uncollectible loans
and leases are charged-off through the allowance. Recoveries of loans and leases previously
charged-off are added to the allowance. A loan or lease is considered impaired when it is probable
that contractual interest and principal payments will not be collected either for the amounts or by
the dates as scheduled in the loan or lease agreement. Impairment is evaluated in aggregate for
smaller-balance loans of similar nature such as residential mortgage, consumer and credit card
loans, and on an individual loan or lease basis for other loans. If a loan or lease is impaired, a
portion of the allowance is allocated so that the loan or lease is reported, net, at the present
fair value of estimated future cash flows using the loans or leases existing interest rate or at
the fair value of collateral if repayment is expected solely from the collateral. Loans and leases
are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious
deficiencies are identified within the credit relationship. Our policy for recognizing income on
impaired loans is to accrue interest unless a loan is placed on nonaccrual status. We put loans
into nonaccrual status when the full collection of principal and interest is not expected.
Income Tax Accounting: Income tax liabilities or assets are established for the amount of
taxes payable or refundable for the current year. Deferred income tax liabilities and assets are
also established for the future tax consequences of events that have been recognized in our
financial statements or tax returns. A deferred income tax liability or asset is recognized for
the estimated future tax effects attributable to temporary differences that can be carried forward
(used) in future years. The valuation of current and deferred income tax liabilities and assets is
considered critical as it requires us to make estimates based on provisions of the enacted tax
laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions,
interpretations and judgments concerning accounting pronouncements, federal and state tax codes and
the extent of future taxable income. There can be no assurance that future events, such as court
decisions, positions of federal and state taxing authorities, and the extent of future taxable
income, will not differ from our current assessment, the impact of which could be significant to
the consolidated results of operations and reported earnings. We believe our tax liabilities and
assets are adequate and are properly recorded in the consolidated financial statements.
INTRODUCTION
This Managements Discussion and Analysis should be read in conjunction with the consolidated
financial statements contained in this Annual Report. This discussion provides information about
the consolidated financial condition and results of operations of Mercantile Bank Corporation and
its consolidated subsidiary, Mercantile Bank of Michigan (our bank), and of Mercantile Bank
Mortgage Company, LLC (our mortgage company), Mercantile Bank Real Estate Co., L.L.C. (our real
estate company) and Mercantile Insurance Center, Inc. (our insurance company), which are
subsidiaries of our bank. Unless the text clearly suggests otherwise, references to us, we,
our, or the company include Mercantile Bank Corporation and its wholly-owned subsidiaries
referred to above.
We were incorporated on July 15, 1997 as a bank holding company to establish and own our bank. Our
bank, after receiving all necessary regulatory approvals, began operations on December 15, 1997.
Our bank has a strong commitment to community banking and offers a wide range of financial products
and services, primarily to small- to medium-sized businesses, as well as individuals. Our banks
lending strategy focuses on commercial lending, and, to a lesser extent, residential mortgage and
consumer lending. Our bank also offers a broad array of deposit products, including checking,
savings, money market, and certificates of deposit, as well as security repurchase agreements. Our
primary markets are the Grand Rapids, Holland, Lansing, Ann Arbor and Oakland County areas. Our
bank utilizes certificates of deposit from customers located outside of the primary market area to
assist in funding the historically strong asset growth our bank has experienced since inception.
We formed a business trust, Mercantile Bank Capital Trust I (the trust), in 2004 to issue trust
preferred securities. We issued subordinated debentures to the trust in return for the proceeds
raised from the issuance of the trust preferred securities. In accordance with FASB Interpretation
No. 46, the trust is not consolidated, but instead we report the subordinated debentures issued to
the trust as a liability.
F-5
Our mortgage companys predecessor, Mercantile Bank Mortgage Company, was formed to increase the
profitability and efficiency of our mortgage loan operations. Mercantile Bank Mortgage Company
initiated
business on October 24, 2000 from our banks contribution of most of its residential mortgage loan
portfolio and participation interests in certain commercial mortgage loans. On the same date, our
bank had also transferred its residential mortgage origination function to Mercantile Bank Mortgage
Company. On January 1, 2004, Mercantile Bank Mortgage Company was reorganized as Mercantile Bank
Mortgage Company, LLC, a limited liability company. Mortgage loans originated and held by our
mortgage company are serviced by our bank pursuant to a servicing agreement.
Our insurance company acquired, at nominal cost, an existing shelf insurance agency effective April
15, 2002. An Agency and Institution Agreement was entered into among our insurance company, our
bank and Hub International for the purpose of providing programs of mass marketed personal lines of
insurance. Insurance product offerings include private passenger automobile, homeowners, personal
inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business
and life insurance products, all of which are provided by and written through companies that have
appointed Hub International as their agent.
Our real estate company was organized on July 21, 2003, principally to develop, construct and own
our facility in downtown Grand Rapids which serves as our banks main office and Mercantile Bank
Corporations headquarters. Construction was completed during the second quarter of 2005.
FINANCIAL CONDITION
Primarily reflecting weakening and relatively poor economic conditions within our markets during
2008, our asset growth during 2008 was lower than historical levels. Assets increased from
$2,121.4 million on December 31, 2007 to $2,208.0 million on December 31, 2008. This represents an
increase in total assets of $86.6 million, or 4.1%. Our asset growth during 2007 was also lower
than historical levels due to competitive commercial loan pricing and underwriting environments,
combined with weakening economic conditions. Asset growth averaged $288.0 million per year during
the period of 2004 through 2006. The increase in total assets during 2008 was primarily comprised
of a $55.7 million increase in net loans and leases and a $31.1 million increase in securities.
The increase in assets was primarily funded by a $90.0 million increase in Federal Home Loan Bank
(FHLB) advances.
Earning Assets
Average earning assets equaled 95.4% of average total assets during 2008, compared to 95.0% during
2007, with our asset composition remaining relatively unchanged. The loan and lease portfolio
continued to comprise a majority of earning assets, followed by securities and federal funds sold.
Our loan and lease portfolio, which equaled 88.9% of average earnings assets during 2008, is
primarily comprised of commercial loans and leases. Commercial loans and leases increased by $51.1
million during 2008, and at December 31, 2008, totaled $1,710.3 million, or 92.1% of the total loan
and lease portfolio. As was the case during 2007, the growth in our commercial loan and lease
portfolio slowed during 2008. The lower level of growth during 2008 primarily reflected the
weakening and relatively poor economic conditions within our markets, compared to 2007 when our
loan growth was slowed by competitive pricing and underwriting environments and weakening economic
conditions within our markets. The competitive pressures, from financial institutions and other
entities such as private equity funds, negatively impacted the volume of loans we booked and
accelerated the level of loan payoffs. We believe that adhering to prudent underwriting practices,
rather than focusing on loan growth, outweighs the resulting lower level of interest income and net
income due to the smaller balance of our commercial loan and lease portfolio.
F-6
The commercial loan and lease portfolio represents loans to businesses generally located within our
market areas. Approximately 70% of the commercial loan and lease portfolio is primarily secured by
real estate properties, with
the remaining generally secured by other business assets such as accounts receivable, inventory,
and equipment. The continued significant concentration of the loan and lease portfolio in
commercial loans and leases and the historical strong growth of this portion of our lending
business are consistent with our stated strategy of focusing a substantial amount of our efforts on
wholesale banking. Corporate and business lending continues to be an area of expertise for our
senior management team, and our commercial lenders have extensive commercial lending experience,
with most having at least ten years experience. Of each of the loan categories that we originate,
commercial loans and leases are most efficiently originated and managed, thus limiting overhead
costs by necessitating the attention of fewer employees. Our commercial lending business generates
the largest portion of local deposits, and is our primary source of demand deposits.
During the latter part of 2007, our loan review function completed a real estate loan project that
expanded our traditional loan coding paradigm to provide increased specificity in the
categorization of loans secured by real estate. The following table summarizes our loans secured
by real estate, excluding residential mortgage loans representing permanent financing to owner
occupied dwellings and home equity lines of credit, as of December 31, 2008:
|
|
|
|
|
Residential Vacant Land |
|
$ |
21,374,000 |
|
Residential Land Development |
|
|
54,055,000 |
|
Residential Construction |
|
|
16,839,000 |
|
Commercial Vacant Land |
|
|
29,269,000 |
|
Commercial Land Development |
|
|
24,629,000 |
|
Commercial Construction NonOwner Occupied |
|
|
102,464,000 |
|
Commercial Construction Owner Occupied |
|
|
9,344,000 |
|
Commercial NonOwner Occupied |
|
|
558,360,000 |
|
Commercial Owner Occupied |
|
|
370,099,000 |
|
|
|
|
|
Total |
|
$ |
1,186,433,000 |
|
|
|
|
|
Residential mortgage and consumer loans increased in aggregate $5.9 million during 2008, and at
December 31, 2008, totaled $146.6 million, or 7.9% of the total loan and lease portfolio. Although
residential mortgage loan and consumer loan portfolios may increase in future periods, we expect
the commercial sector of the lending efforts and resultant assets to remain the dominant loan
portfolio category given our wholesale banking strategy.
The following table presents total loans outstanding as of December 31, 2008, according to
scheduled repayments of principal on fixed rate loans and repricing frequency on variable rate
loans. Floating rate loans that are currently at interest rate ceilings or interest rate floors
are treated as fixed rate loans and are reflected using maturity date and not repricing frequency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-1 |
|
|
1-5 |
|
|
After 5 |
|
|
|
|
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
$ |
183,749,000 |
|
|
$ |
79,285,000 |
|
|
$ |
358,000 |
|
|
$ |
263,392,000 |
|
Real estate secured by 1-4 family
properties |
|
|
69,079,000 |
|
|
|
57,214,000 |
|
|
|
14,483,000 |
|
|
|
140,776,000 |
|
Real estate secured by multi-family
properties |
|
|
31,107,000 |
|
|
|
13,784,000 |
|
|
|
2,474,000 |
|
|
|
47,365,000 |
|
Real estate secured by
nonresidential properties |
|
|
360,096,000 |
|
|
|
477,023,000 |
|
|
|
44,231,000 |
|
|
|
881,350,000 |
|
Commercial |
|
|
368,926,000 |
|
|
|
132,709,000 |
|
|
|
14,566,000 |
|
|
|
516,201,000 |
|
Leases |
|
|
143,000 |
|
|
|
1,842,000 |
|
|
|
0 |
|
|
|
1,985,000 |
|
Consumer |
|
|
2,447,000 |
|
|
|
2,808,000 |
|
|
|
591,000 |
|
|
|
5,846,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,015,547,000 |
|
|
$ |
764,665,000 |
|
|
$ |
76,703,000 |
|
|
$ |
1,856,915,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans |
|
$ |
318,977,000 |
|
|
$ |
764,422,000 |
|
|
$ |
63,223,000 |
|
|
$ |
1,146,622,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate loans |
|
|
696,570,000 |
|
|
|
243,000 |
|
|
|
13,480,000 |
|
|
|
710,293,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,015,547,000 |
|
|
$ |
764,665,000 |
|
|
$ |
76,703,000 |
|
|
$ |
1,856,915,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines
include loan review and early identification of problem loans and leases to provide effective loan
and lease portfolio administration. The credit policies and procedures are meant to minimize the
risk and uncertainties inherent in lending. In following these policies and procedures, we must
rely on estimates, appraisals and evaluations of loans
and leases and the possibility that changes in these could occur quickly because of changing
economic conditions. Identified problem loans and leases, which exhibit characteristics (financial
or otherwise) that could cause the loans and leases to become nonperforming or require
restructuring in the future, are included on the internal watch list. Senior management and the
Board of Directors review this list regularly.
The level of net loan and lease charge-offs and nonperforming assets has increased during the past
two years. Although we were never directly involved in the underwriting of or the investing in
subprime residential real estate loans, the apparent substantial and rapid collapse of this line of
business during 2007 and 2008 throughout the United States had a significant negative impact on the
residential real estate development lending portion of our business. The resulting decline in real
estate prices and slowdown in sales stretched the cash flow of our local developers and eroded the
value of our underlying collateral, causing elevated levels of nonperforming assets and net loan
and lease charge-offs.
As of December 31, 2007, nonperforming assets totaled $35.7 million, or 1.68% of total assets, an
increase from the $9.6 million, or 0.46% of total assets, as of December 31, 2006. Nonperforming
loans and leases totaled $29.8 million and foreclosed properties/repossessed assets equaled $5.9
million at year-end 2007, compared to $8.6 million and $1.0 million, respectively, at year-end
2006. As of December 31, 2007, nonperforming loans secured by real estate, combined with all
foreclosed properties, totaled $28.6 million, or 80% of total nonperforming assets. Nonperforming
loans and foreclosed properties associated with the development of residential real estate totaled
$11.1 million, with another $3.2 million in nonperforming loans secured by, and foreclosed
properties consisting of, residential properties. Net loan and lease charge-offs during 2007
totaled $6.7 million, or 0.38% of average total loans and leases. During 2006, net loan and lease
charge-offs totaled $4.9 million, or 0.29% of average total loans and leases.
During the first quarter of 2008, we experienced a sudden and rapid deterioration in a number of
commercial loan relationships which previously had been performing fairly well. An analysis of
certain commercial borrowers revealed a reduced capability on the part of these borrowers to make
required payments as indicated by factors such as delinquent loan payments, diminished cash flow,
deteriorating financial performance, or past due property taxes, and in the case of commercial and
residential development projects slow absorption or sales trends. In addition, commercial real
estate is the primary source of collateral for many of these borrowing relationships and updated
evaluations and appraisals in many cases reflected significant declines from the original estimated
values.
During the second quarter of 2008, we found that the financial performance of some of our borrowers
and guarantors had become increasingly strained, as real estate remained unsold or insufficiently
leased and liquid sources of repayment were exhausted or significantly depleted. Completed
evaluations and appraisals during this period reflected substantial declines from the originally
estimated values, and in some cases even in comparison to property value estimates made within the
past several quarters.
While we continued to face a distressed operating environment during the third quarter of 2008, we
experienced a marked slowdown in borrowing relationships that deteriorated to nonperforming status.
In addition, we saw notable improvement in a number of larger commercial loan relationships.
Although we experienced a small net increase in the level of nonperforming assets during the third
quarter, the rate of increase was considerably lower than over the past few quarters.
During the fourth quarter of 2008, we saw a continuation of the stresses caused by the weakening
and poor economic conditions, especially in the commercial real estate markets. High vacancy rates
or slow absorption has resulted in inadequate cash flow generated from some real estate projects we
have financed, and has required guarantors to provide personal funds to make full contractual loan
payments and pay other operating costs. In some cases, the guarantors cash reserves have become
seriously diminished, not only from recent cash outlays but from depressed stock portfolios as well. In addition, auto industry uncertainties are placing stress on
the commercial and industrial segment of our loan portfolio.
F-8
As of December 31, 2008, nonperforming assets totaled $57.4 million, or 2.60% of total assets, an
increase from the $35.7 million, or 1.68% of total assets, as of December 31, 2007. Nonperforming
loans and leases totaled $49.3 million and foreclosed properties/repossessed assets equaled $8.1
million at year-end 2008, compared to $29.8 million and $5.9 million, respectively, at year-end
2007. As of December 31, 2008, nonperforming loans secured by real estate, combined with all
foreclosed properties, totaled $52.3 million, or about 91% of total nonperforming assets.
Nonperforming loans and foreclosed properties associated with the development of residential real
estate totaled $25.3 million, with another $4.2 million in nonperforming loans secured by, and
foreclosed properties consisting of, residential properties. Net loan and lease charge-offs during
2008 totaled $19.9 million, or 1.09% of average total loans and leases. During 2007, net loan and
lease charge-offs totaled $6.7 million, or 0.38% of average total loans and leases. The increase
in net loan and lease charge-offs during 2008 primarily reflects a combination of a higher level of
nonperforming assets and the significant decline in property values.
The following table provides a breakdown of nonperforming assets as of December 31, 2008 and net
loan charge-offs during 2008 by property type:
|
|
|
|
|
|
|
|
|
|
|
Nonperforming |
|
|
Net Loan |
|
|
|
Assets |
|
|
Charge-Offs |
|
|
Residential Land Development |
|
$ |
14,273,000 |
|
|
$ |
2,624,000 |
|
Residential Construction |
|
|
11,040,000 |
|
|
|
604,000 |
|
Residential Owner Occupied / Rental |
|
|
4,160,000 |
|
|
|
2,850,000 |
|
Commercial Land Development |
|
|
2,234,000 |
|
|
|
1,599,000 |
|
Commercial Owner Occupied |
|
|
6,495,000 |
|
|
|
789,000 |
|
Commercial NonOwner Occupied |
|
|
14,055,000 |
|
|
|
5,710,000 |
|
Commercial NonReal Estate |
|
|
5,134,000 |
|
|
|
5,688,000 |
|
Consumer NonReal Estate |
|
|
30,000 |
|
|
|
42,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
57,421,000 |
|
|
$ |
19,906,000 |
|
|
|
|
|
|
|
|
The following table summarizes nonperforming loans and leases and troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases on
nonaccrual status |
|
$ |
47,945,000 |
|
|
$ |
28,832,000 |
|
|
$ |
7,752,000 |
|
|
$ |
3,601,000 |
|
|
$ |
2,842,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases 90
days or more past
due and accruing
interest |
|
|
1,358,000 |
|
|
|
977,000 |
|
|
|
819,000 |
|
|
|
394,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt
restructurings |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,303,000 |
|
|
$ |
29,809,000 |
|
|
$ |
8,571,000 |
|
|
$ |
3,995,000 |
|
|
$ |
2,842,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
The following table summarizes changes in the allowance for loan and lease losses for the past five
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and leases outstanding at year-end |
|
$ |
1,856,915,000 |
|
|
$ |
1,799,880,000 |
|
|
$ |
1,745,478,000 |
|
|
$ |
1,561,812,000 |
|
|
$ |
1,317,124,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance of loans and
leases outstanding |
|
$ |
1,829,686,000 |
|
|
$ |
1,765,465,000 |
|
|
$ |
1,660,284,000 |
|
|
$ |
1,432,609,000 |
|
|
$ |
1,177,568,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance at beginning of
year |
|
$ |
25,814,000 |
|
|
$ |
21,411,000 |
|
|
$ |
20,527,000 |
|
|
$ |
17,819,000 |
|
|
$ |
14,379,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
(12,566,000 |
) |
|
|
(4,232,000 |
) |
|
|
(5,208,000 |
) |
|
|
(718,000 |
) |
|
|
(1,328,000 |
) |
Construction and land development |
|
|
(4,835,000 |
) |
|
|
(1,353,000 |
) |
|
|
0 |
|
|
|
(521,000 |
) |
|
|
0 |
|
Leases |
|
|
(174,000 |
) |
|
|
(18,000 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Residential real estate |
|
|
(2,900,000 |
) |
|
|
(1,618,000 |
) |
|
|
(50,000 |
) |
|
|
(131,000 |
) |
|
|
(16,000 |
) |
Instalment loans to individuals |
|
|
(119,000 |
) |
|
|
(53,000 |
) |
|
|
(131,000 |
) |
|
|
(22,000 |
) |
|
|
(61,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases charged-off |
|
|
(20,594,000 |
) |
|
|
(7,274,000 |
) |
|
|
(5,389,000 |
) |
|
|
(1,392,000 |
) |
|
|
(1,405,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of previously charged-off
loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
597,000 |
|
|
|
586,000 |
|
|
|
487,000 |
|
|
|
298,000 |
|
|
|
150,000 |
|
Construction and land development |
|
|
8,000 |
|
|
|
11,000 |
|
|
|
0 |
|
|
|
2,000 |
|
|
|
0 |
|
Leases |
|
|
6,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Residential real estate |
|
|
51,000 |
|
|
|
3,000 |
|
|
|
2,000 |
|
|
|
6,000 |
|
|
|
0 |
|
Instalment loans to individuals |
|
|
26,000 |
|
|
|
7,000 |
|
|
|
9,000 |
|
|
|
4,000 |
|
|
|
21,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
688,000 |
|
|
|
607,000 |
|
|
|
498,000 |
|
|
|
310,000 |
|
|
|
171,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(19,906,000 |
) |
|
|
(6,667,000 |
) |
|
|
(4,891,000 |
) |
|
|
(1,082,000 |
) |
|
|
(1,234,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and leases losses |
|
|
21,200,000 |
|
|
|
11,070,000 |
|
|
|
5,775,000 |
|
|
|
3,790,000 |
|
|
|
4,674,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance at year-end |
|
$ |
27,108,000 |
|
|
$ |
25,814,000 |
|
|
$ |
21,411,000 |
|
|
$ |
20,527,000 |
|
|
$ |
17,819,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs during the
period to average loans and leases
outstanding during the period |
|
|
(1.09 |
%) |
|
|
(0.38 |
%) |
|
|
(0.29 |
%) |
|
|
(0.08 |
%) |
|
|
(0.10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance to loans and leases
outstanding at end of the period |
|
|
1.46 |
% |
|
|
1.43 |
% |
|
|
1.23 |
% |
|
|
1.31 |
% |
|
|
1.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In each accounting period, we adjust the allowance to the amount we believe is necessary to
maintain the allowance at adequate levels. Through the loan and lease review and credit
departments, we attempt to establish specific portions of the allowance based on specifically
identifiable problem loans and leases. The evaluation of the allowance is further based on, but
not limited to, consideration of the internally prepared Reserve Analysis, composition of the loan
and lease portfolio, third party analysis of the loan and lease administration processes and
portfolio and general economic conditions. In addition, the historically strong commercial loan
and lease growth and expansions into new markets are taken into account.
The Reserve Analysis, used since our inception and completed monthly, applies reserve allocation
factors to outstanding loan and lease balances to calculate an overall allowance dollar amount.
For commercial loans and leases, which continue to comprise a vast majority of our total loans and
leases, reserve allocation factors are based upon the loan ratings as determined by our
standardized grade paradigms. For retail loans, reserve allocation factors are based upon the type
of credit. Adjustments for specific lending relationships, including impaired loans and leases,
are made on a case-by-case basis. The reserve allocation factors are primarily based on the recent
levels and historical trends of net loan charge-offs and non-performing assets, the comparison of
the recent levels and historical trends of net loan charge-offs and non-performing assets with a
customized peer group consisting of ten similarly-sized publicly traded banking organizations
conducting business in the states of Michigan, Illinois, Indiana or Ohio, the review and
consideration of our loan and lease migration analysis and the
experience of senior management
making similar loans and leases for an extensive period of time. We regularly review the Reserve
Analysis and make adjustments periodically based upon identifiable trends and experience.
F-10
The following table illustrates the breakdown of the allowance balance to loan type (dollars in
thousands) and of the total loan and lease portfolio (in percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and
agricultural |
|
$ |
20,170 |
|
|
|
77.9 |
% |
|
$ |
18,947 |
|
|
|
77.4 |
% |
|
$ |
15,706 |
|
|
|
74.7 |
% |
|
$ |
16,507 |
|
|
|
76.9 |
% |
|
$ |
15,457 |
|
|
|
79.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and
land development |
|
|
5,137 |
|
|
|
14.1 |
|
|
|
4,907 |
|
|
|
14.7 |
|
|
|
3,975 |
|
|
|
17.1 |
|
|
|
2,868 |
|
|
|
14.5 |
|
|
|
1,581 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
41 |
|
|
|
0.1 |
|
|
|
29 |
|
|
|
0.1 |
|
|
|
15 |
|
|
|
0.1 |
|
|
|
30 |
|
|
|
0.1 |
|
|
|
39 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real
estate |
|
|
1,656 |
|
|
|
7.6 |
|
|
|
1,829 |
|
|
|
7.5 |
|
|
|
1,591 |
|
|
|
7.6 |
|
|
|
1,020 |
|
|
|
8.2 |
|
|
|
557 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instalment loans to
individuals |
|
|
104 |
|
|
|
0.3 |
|
|
|
102 |
|
|
|
0.3 |
|
|
|
124 |
|
|
|
0.5 |
|
|
|
102 |
|
|
|
0.3 |
|
|
|
185 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,108 |
|
|
|
100.0 |
% |
|
$ |
25,814 |
|
|
|
100.0 |
% |
|
$ |
21,411 |
|
|
|
100.0 |
% |
|
$ |
20,527 |
|
|
|
100.0 |
% |
|
$ |
17,819 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary risk elements with respect to commercial loans and leases are the financial condition
of the borrower, the sufficiency of collateral, and lack of timely payment. We have a policy of
requesting and reviewing periodic financial statements from commercial loan and lease customers,
and we periodically review the existence of collateral and its value. The primary risk element
with respect to each instalment and residential real estate loan is lack of timely payment. We
have a reporting system that monitors past due loans and have adopted policies to pursue creditors
rights in order to preserve our banks position.
Although we believe that the allowance is adequate to sustain losses as they arise, there can be no
assurance that our bank will not sustain losses in any given period that could be substantial in
relation to, or greater than, the size of the allowance.
Securities increased $31.1 million during 2008, from $211.7 million on December 31, 2007 to $242.8
million at December 31, 2008. During 2008, the securities portfolio equaled 10.6% of average
earning assets. Proceeds from called U.S. Government Agency bonds totaled $60.0 million during
2008, with another $8.1 million received from principal paydowns on mortgage-backed securities and
$1.8 million from matured and called tax-exempt municipal securities. The proceeds were invested
back into the securities portfolio, with $40.9 million invested in U.S. Government Agency bonds and
$27.7 million invested in mortgage-backed securities. We also purchased $27.6 million in bonds
issued through the Michigan Strategic Fund during 2008, although we sold $5.5 million shortly after
purchase. These bonds are purchased and sold at par value, and are sellable back to the
re-marketing brokerage firm weekly. In addition, FHLB of Indianapolis stock increased $5.9 million
to support the increased level of FHLB advances. We maintain the securities portfolio at levels to
provide adequate pledging for the repurchase agreement program and secondary liquidity for our
daily operations. In addition, the portfolio serves a primary interest rate risk management
function. At December 31, 2008, the portfolio was comprised of high credit quality U.S. Government
Agency issued bonds (26%), U.S. Government Agency issued and guaranteed mortgage-backed securities
(32%), tax-exempt municipal general obligation and revenue bonds (27%), Michigan Strategic Fund
bonds (9%), Federal Home Loan Bank stock (6%) and a mutual fund (less than 1%).
F-11
The following table reflects the composition of the securities portfolio, excluding Federal Home
Loan Bank stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
|
Carrying Value |
|
|
Percentage |
|
|
Carrying Value |
|
|
Percentage |
|
|
Carrying Value |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
agency debt
obligations |
|
$ |
62,382,000 |
|
|
|
27.5 |
% |
|
$ |
80,945,000 |
|
|
|
40.1 |
% |
|
$ |
76,836,000 |
|
|
|
39.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
77,026,000 |
|
|
|
33.9 |
|
|
|
54,619,000 |
|
|
|
27.0 |
|
|
|
53,083,000 |
|
|
|
27.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal general
obligations |
|
|
56,893,000 |
|
|
|
25.1 |
|
|
|
57,668,000 |
|
|
|
28.5 |
|
|
|
56,870,000 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal revenue
bonds |
|
|
7,544,000 |
|
|
|
3.3 |
|
|
|
7,662,000 |
|
|
|
3.8 |
|
|
|
7,073,000 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan Strategic
Fund bonds |
|
|
22,105,000 |
|
|
|
9.7 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund |
|
|
1,156,000 |
|
|
|
0.5 |
|
|
|
1,109,000 |
|
|
|
0.6 |
|
|
|
1,048,000 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
227,106,000 |
|
|
|
100.0 |
% |
|
$ |
202,003,000 |
|
|
|
100.0 |
% |
|
$ |
194,910,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All securities, with the exception of tax-exempt municipal bonds, have been designated as
available for sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Securities designated as
available for sale are stated at fair value, with the unrealized gains and losses, net of income
tax, reported as a separate component of shareholders equity in accumulated other comprehensive
income. The fair value of securities designated as available for sale at December 31, 2008 and
2007 was $162.7 million and $136.7 million, respectively. The net unrealized gain recorded at
year-end 2008 was $3.2 million, compared to a net unrealized gain of $0.4 million at year-end 2007.
All tax-exempt municipal bonds have been designated as held to maturity as defined in SFAS No.
115, and are stated at amortized cost. As of December 31, 2008 and 2007, held to maturity
securities had an amortized cost of $64.4 million and $65.3 million and a fair value of $65.4
million and $66.4 million, respectively.
Market values on our U.S. Government Agency bonds, mortgage-backed securities issued or guaranteed
by U.S. Government Agencies and tax-exempt municipal securities are determined on a monthly basis
with the assistance of a third party vendor. Evaluated pricing models that vary by type of
security and incorporate available market data are utilized. Standard inputs include issuer and
type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The
market value of other securities is estimated at carrying value as those financial instruments are
generally bought and sold at par value. We believe our valuation methodology provides for a
reasonable estimation of market value, and that it is consistent with the requirements of SFAS No.
157. Reference is made to Note 15 for additional information.
F-12
The following table shows by class of maturities as of December 31, 2008, the amounts and weighted
average yields of investment securities (1):
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Average |
|
|
|
Value |
|
|
Yield |
|
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations |
|
|
|
|
|
|
|
|
One year or less |
|
$ |
0 |
|
|
NA |
|
Over one through five years |
|
|
12,235,000 |
|
|
|
4.70 |
% |
Over five through ten years |
|
|
17,065,000 |
|
|
|
5.29 |
|
Over ten years |
|
|
33,082,000 |
|
|
|
5.33 |
|
|
|
|
|
|
|
|
|
|
|
62,382,000 |
|
|
|
5.20 |
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions |
|
|
|
|
|
|
|
|
One year or less |
|
|
1,884,000 |
|
|
|
6.64 |
|
Over one through five years |
|
|
10,457,000 |
|
|
|
6.73 |
|
Over five through ten years |
|
|
13,496,000 |
|
|
|
6.57 |
|
Over ten years |
|
|
38,600,000 |
|
|
|
6.35 |
|
|
|
|
|
|
|
|
|
|
|
64,437,000 |
|
|
|
6.47 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
77,026,000 |
|
|
|
5.16 |
|
Michigan Strategic Fund bonds |
|
|
22,105,000 |
|
|
|
2.99 |
|
Mutual fund |
|
|
1,156,000 |
|
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
227,106,000 |
|
|
|
5.32 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields on tax-exempt securities are computed on a fully taxable-equivalent basis. |
Federal funds sold, consisting of excess funds sold overnight to correspondent banks, are used to
manage daily liquidity needs and interest rate sensitivity. During 2008, the average balance of
these funds equaled 0.6% of average earning assets, up slightly from 0.4% during 2007. The levels
maintained during 2008 and 2007 are well within our internal policy guidelines. Given the volatile
market conditions, during the fourth quarter of 2008 we made the decision to operate with a higher
than normal balance of federal funds sold. It is expected that we will maintain the higher balance
of federal funds sold, likely to average 1.0% to 1.5% of average earning assets, until market
conditions return to more normalized levels.
Non-Earning Assets
Cash and due from bank balances decreased from $29.1 million at December 31, 2007, to $16.8 million
on December 31, 2008, a decrease of $12.3 million. While we experienced only nominal change in our
cash balances, our due from bank balances declined significantly primarily due to two programs that
were instituted in mid 2007: 1) an image exchange program with our primary correspondent bank for
our outgoing cash letter that resulted in faster collection of items in the outgoing cash letter,
and 2) the virtual elimination of required reserves on deposit with the Federal Reserve Bank of
Chicago due to the institution of a deposit reclassification program. Cash and due from bank
balances averaged $21.0 million, or 1.0% of average assets during 2008, compared to $33.1 million,
or 1.6% of average assets, during 2007.
Net premises and equipment decreased from $34.3 million at December 31, 2007, to $32.3 million on
December 31, 2008, a decrease of $2.0 million. Net purchases of premises and equipment during 2008
totaled $0.7, while depreciation and amortization expense equaled $2.7 million.
F-13
Source of Funds
Our major sources of funds are from deposits, repurchase agreements and FHLB advances. Total
deposits increased from $1,591.2 million at December 31, 2007, to $1,599.6 million on December 31,
2008, an increase of $8.4 million. Local deposits decreased from $666.1 million at year-end 2007,
to $470.4 million at year-end 2008, a decrease of $195.7 million. Out-of-area deposits increased
from $925.0 million at December 31, 2007, to $1,129.2 million on December 31, 2008, an increase of
$204.2 million. FHLB advances increased from $180.0 million at year-end 2007 to $270.0 million at
year-end 2008, while repurchase agreements decreased from $97.5 million to $94.4 million, or $3.1
million, during the same time period. At December 31, 2008, local deposits and repurchase
agreements equaled 28.0% of total funding liabilities, compared to 39.8% on December 31, 2007.
We experienced declines in our local deposits throughout 2008, but especially during the latter
half of 2008, for a variety of reasons. First, we witnessed local depositors purposely reducing
their deposit balances with us, in large part reflecting their concerns over our financial health
and that of the entire banking industry, with some larger depositors transferring portions of their
deposit balances to one or more other financial institutions. This practice was very pronounced
with our municipality and larger business and individual deposit customers. Next, we lost deposit
balances due to relatively high certificate of deposit rates offered by some financial institutions
located in our markets. While we believe our certificate of deposit rates, which in most cases
exceed the rates offered in the brokered deposit markets, are competitive, some financial
institutions in our markets were offering certificate of deposit rates that far exceeded our rates,
sometimes by as much as 100 basis points. Finally, it appears that the distressed economy is
resulting in some of our business customers having lower checking and savings account balances and
municipal customers having lower savings and certificate of deposit balances than typical.
Noninterest-bearing checking deposit accounts declined $22.4 million during 2008, primarily
resulting from lower deposit balances from our title company depositors due in large part to lower
volumes of real estate transactions. Interest-bearing checking accounts increased $5.8 million and
money market deposit accounts increased $13.0 million during 2008, the latter primarily reflecting
a $10.0 million deposit from a local municipality. Savings account balances recorded a decrease of
$30.8 million during 2008, while certificates of deposit purchased by customers located within our
market areas decreased $161.4 million. These declines are due to a combination of risk
diversification practices on the part of the depositors, higher deposit rates offered by
competitors and lower funds available stemming from the distressed economy. One municipal
depositor withdrew about $32.0 million in December of 2008 upon the maturity of a single
certificate of deposit, but soon thereafter opened a $10.0 million money market deposit account and
then in January 2009 opened a new $20.0 million certificate of deposit.
The local deposit environment was very challenging during 2008, and it appears that it will remain
that way for at least the next few quarters. Until our operating results and overall financial
health improve, as well as that of the entire banking industry, it is very likely that some
customers will continue to engage in risk diversification practices. Combined with a distressed
economy and a competitive banking environment, our ability to raise local deposits efficiently and
economically will be difficult. However, we continue to enjoy deposit relationships with virtually
all of our customers who have withdrawn some of their deposits, and we have developed various
strategic plans and initiatives to hopefully regain a majority of the lost deposits in future
periods. Maintaining and growing our local deposit base is one of our key initiatives.
Certificates of deposit obtained from customers located outside of our market areas increased by
$204.2 million during 2008, and as of December 31, 2008 totaled $1,129.2 million. The increase
primarily reflects the decline in our local deposit base, net of the growth in FHLB advances.
Out-of-area deposits consist primarily of certificates of deposit placed by deposit brokers for a
fee, but also include certificates of deposit obtained from the deposit owners directly. The
owners of the out-of-area deposits include individuals, businesses and governmental units located
throughout the United States.
Repurchase agreements decreased $3.1 million during 2008, and as of December 31, 2008 totaled $94.4
million. As part of our sweep account program, collected funds from certain business
noninterest-bearing checking accounts are invested in overnight interest-bearing repurchase
agreements. Such repurchase agreements are not deposit accounts and are not afforded federal
deposit insurance.
F-14
FHLB advances increased $90.0 million during 2008, and as of December 31, 2008 totaled $270.0
million. FHLB advances are collateralized by residential mortgage loans, first mortgage liens on
multi-family residential property
loans, first mortgage liens on commercial real estate property loans, and substantially all other
assets of our bank, under a blanket lien arrangement. Our borrowing line of credit at December 31,
2008 totaled $316.5 million, with availability approximating $37.0 million.
Shareholders equity decreased $3.8 million during 2008. The decrease was primarily attributable
to net loss from operations, which totaled $5.0 million during 2008. Also negatively impacting
shareholders equity during 2008 was the payment of cash dividends, which totaled $2.6 million.
Positively impacting shareholders equity was unrealized gains for a $1.8 million, net of tax,
adjustment for available for sale securities as defined in SFAS No. 115, and a $1.2 million, net of
tax, change in the fair value of interest rate swaps.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 and 2007
Summary
A net loss of $5.0 million, or $0.59 per basic and diluted share, was recorded in 2008, compared to
net income of $9.0 million, or $1.06 per basic and diluted share, generated in 2007. The decline
in earnings performance during 2008 from that of 2007 is primarily the result of lower net interest
income and a higher provision for loan and lease losses. Net income during 2007 includes a
one-time $1.2 million ($0.8 million after-tax) expense associated with the financial retirement
package for former Chairman and Chief Executive Officer, Gerald R. Johnson Jr., which was recorded
in conjunction with Mr. Johnsons retirement effective June 30, 2007. Excluding this one-time
expense, net income for 2007 was $9.8 million, or $1.16 per basic share and $1.15 per diluted
share.
The following table shows some of the key performance and equity ratios for the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Return on average assets |
|
|
(0.23 |
)% |
|
|
0.43 |
% |
Return on average shareholders equity |
|
|
(2.87 |
) |
|
|
5.10 |
|
Dividend payout ratio |
|
|
NA |
|
|
|
52.16 |
|
Average shareholders equity to average assets |
|
|
8.01 |
|
|
|
8.44 |
|
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest
cost of funding those assets, is our primary source of earnings. Interest income (adjusted for
tax-exempt income) and interest expense totaled $122.3 million and $74.9 million during 2008,
respectively, providing for net interest income of $47.4 million. During 2007, interest income and
interest expense were $145.4 million and $88.6 million, respectively, providing for net interest
income of $56.8 million. In comparing 2008 with 2007, interest income decreased 15.9%, interest
expense was down 15.5%, and net interest income decreased 16.4%. The level of net interest income
is primarily a function of asset size, as the weighted average interest rate received on earning
assets is greater than the weighted average interest cost of funding sources; however, factors such
as types and levels of assets and liabilities, interest rate environment, interest rate risk, asset
quality, liquidity, and customer behavior also impact net interest income as well as the net
interest margin.
F-15
The net interest margin declined from 2.87% in 2007 to 2.30% in 2008, a decrease of 19.9%. With
approximately 60% of our total loans and leases tied to Prime or LIBOR rates, our earning asset
yield in 2008 has been substantially impacted by the steep reduction in market interest rates that
began late in the third quarter of 2007. Between mid-September 2007 and late April 2008, the
Federal Open Market Committee (FOMC) lowered the
targeted federal funds rate by a total of 325 basis points. The resulting similar decline in the
Prime and LIBOR rates, combined with an increased level of nonperforming assets, a very competitive
loan and deposit environment, and a flat to inverted yield curve over an extended period of time,
have significantly negatively impacted our yield on earning assets and level of interest income.
Our cost of funds also decreased in 2008 compared to 2007 as we paid lower interest rates on our
deposits and borrowings; however, due to a significant portion of our interest-bearing liabilities
being comprised of fixed rate certificates of deposit and borrowings, our cost of funds declined at
a much slower rate than our earning asset yield, resulting in the compressed net interest margin.
The decision by the FOMC to lower the targeted federal funds rate by 50 basis points in early
October 2008 placed additional pressure on our yield on earning assets and level of interest income
in light of our Prime-based loans repricing downward. Although the FOMC lowered the targeted
federal funds rate by another 50 basis points in late October 2008 and an additional 75 basis
points in mid-December 2008, we decided to keep the Mercantile Bank Prime Rate unchanged at 4.50%.
Virtually all of our prime-based commercial floating rate loans are tied to the Mercantile Bank
Prime Rate. Despite the 100 basis point reduction in the targeted federal funds rate in October
2008, deposit rates remained substantially unchanged. The steady deposit rates, combined with an
already very low Prime Rate, placed significant pressure on our net interest income and net
interest margin, and we believed it was prudent to not lower the Mercantile Bank Prime Rate in
association with the FOMCs 50 basis point reduction in the targeted federal funds rate in late
October and the 75 basis point reduction in mid-December.
Our net interest margin, which equaled 2.15% in the second quarter of 2008, has improved over the
last six months of 2008, equaling 2.30% and 2.40% in the third and fourth quarters of 2008,
respectively. Our implementation of several loan pricing initiatives, including the decision to
not lower the Mercantile Prime Rate in association with the two most recent FOMC rate reductions,
stabilized our yield on loans and leases in the latter part of 2008. The stabilization of our
earning asset yield, which is most influenced by our yield on loans and leases, combined with a
reduction in our cost of funds resulting from maturing fixed rate certificates of deposit and
borrowings repricing downward in light of decreased market interest rates, resulted in the improved
net interest margin. If the interest rate environment stabilizes in 2009, we anticipate that the
quarterly net interest margin improvement experienced during the last two quarters of 2008 will
continue as we continue to reprice maturing fixed rate liabilities downward.
During the first six months of 2008, we entered into interest rate swaps to convert the variable
rate cash flows on certain of our Prime-based commercial loans to a fixed rate of interest. On
October 30, 2008, we terminated all of our interest rate swaps. The termination coincides with our
decision to not lower the Mercantile Bank Prime Rate in association with the FOMCs reduction of
the targeted federal funds rate by 50 basis points announced on October 29, 2008. During 2008, the
net cash flow received from the interest rate swap arrangements contributed $1.0 million to
interest income.
The following table depicts the average balance, interest earned and paid, and weighted average
rate of our assets, liabilities and shareholders equity during 2008, 2007 and 2006. The
subsequent table also depicts the dollar amount of change in interest income and interest expense
of interest-earning assets and interest-bearing liabilities, segregated between change due to
volume and change due to rate. For tax-exempt investment securities, interest income and yield
have been computed on a tax equivalent basis using a marginal tax rate of 35%. As a result,
securities interest income was increased by $1.2 million in each of 2008, 2007 and 2006.
F-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Taxable securities |
|
$ |
147,668 |
|
|
$ |
7,888 |
|
|
|
5.34 |
% |
|
$ |
141,289 |
|
|
$ |
7,243 |
|
|
|
5.13 |
% |
|
$ |
128,382 |
|
|
$ |
6,557 |
|
|
|
5.11 |
% |
Tax-exempt
securities |
|
|
69,857 |
|
|
|
4,180 |
|
|
|
5.98 |
|
|
|
64,122 |
|
|
|
4,013 |
|
|
|
6.26 |
|
|
|
61,949 |
|
|
|
3,930 |
|
|
|
6.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
217,525 |
|
|
|
12,068 |
|
|
|
5.55 |
|
|
|
205,411 |
|
|
|
11,256 |
|
|
|
5.48 |
|
|
|
190,331 |
|
|
|
10,487 |
|
|
|
5.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
1,829,686 |
|
|
|
110,013 |
|
|
|
6.01 |
|
|
|
1,765,465 |
|
|
|
133,685 |
|
|
|
7.57 |
|
|
|
1,660,284 |
|
|
|
127,470 |
|
|
|
7.68 |
|
Short-term
investments |
|
|
392 |
|
|
|
7 |
|
|
|
1.79 |
|
|
|
510 |
|
|
|
20 |
|
|
|
3.92 |
|
|
|
320 |
|
|
|
12 |
|
|
|
3.75 |
|
Federal funds sold |
|
|
11,353 |
|
|
|
204 |
|
|
|
1.80 |
|
|
|
8,239 |
|
|
|
420 |
|
|
|
5.10 |
|
|
|
9,745 |
|
|
|
482 |
|
|
|
4.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning
assets |
|
|
2,058,956 |
|
|
|
122,292 |
|
|
|
5.94 |
|
|
|
1,979,625 |
|
|
|
145,381 |
|
|
|
7.34 |
|
|
|
1,860,680 |
|
|
|
138,451 |
|
|
|
7.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
and lease losses |
|
|
(30,184 |
) |
|
|
|
|
|
|
|
|
|
|
(23,157 |
) |
|
|
|
|
|
|
|
|
|
|
(21,464 |
) |
|
|
|
|
|
|
|
|
Cash and due
from banks |
|
|
21,004 |
|
|
|
|
|
|
|
|
|
|
|
33,099 |
|
|
|
|
|
|
|
|
|
|
|
38,298 |
|
|
|
|
|
|
|
|
|
Other non-earning
assets |
|
|
107,546 |
|
|
|
|
|
|
|
|
|
|
|
94,279 |
|
|
|
|
|
|
|
|
|
|
|
82,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,157,322 |
|
|
|
|
|
|
|
|
|
|
$ |
2,083,846 |
|
|
|
|
|
|
|
|
|
|
$ |
1,959,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits |
|
$ |
42,734 |
|
|
$ |
492 |
|
|
|
1.15 |
% |
|
$ |
37,143 |
|
|
$ |
1,047 |
|
|
|
2.82 |
% |
|
$ |
36,530 |
|
|
$ |
1,069 |
|
|
|
2.93 |
% |
Savings deposits |
|
|
65,091 |
|
|
|
922 |
|
|
|
1.42 |
|
|
|
86,009 |
|
|
|
2,977 |
|
|
|
3.46 |
|
|
|
93,046 |
|
|
|
3,328 |
|
|
|
3.58 |
|
Money market
accounts |
|
|
13,948 |
|
|
|
192 |
|
|
|
1.38 |
|
|
|
11,706 |
|
|
|
359 |
|
|
|
3.07 |
|
|
|
10,326 |
|
|
|
325 |
|
|
|
3.15 |
|
Time deposits |
|
|
1,332,071 |
|
|
|
58,206 |
|
|
|
4.37 |
|
|
|
1,385,260 |
|
|
|
71,838 |
|
|
|
5.19 |
|
|
|
1,289,777 |
|
|
|
60,033 |
|
|
|
4.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,453,844 |
|
|
|
59,812 |
|
|
|
4.11 |
|
|
|
1,520,118 |
|
|
|
76,221 |
|
|
|
5.01 |
|
|
|
1,429,679 |
|
|
|
64,755 |
|
|
|
4.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings |
|
|
97,313 |
|
|
|
2,021 |
|
|
|
2.08 |
|
|
|
93,307 |
|
|
|
3,493 |
|
|
|
3.74 |
|
|
|
75,885 |
|
|
|
2,867 |
|
|
|
3.78 |
|
Federal Home Loan
Bank advances |
|
|
258,939 |
|
|
|
10,554 |
|
|
|
4.08 |
|
|
|
118,904 |
|
|
|
6,100 |
|
|
|
5.13 |
|
|
|
121,932 |
|
|
|
5,393 |
|
|
|
4.42 |
|
Long-term
borrowings |
|
|
46,579 |
|
|
|
2,476 |
|
|
|
5.32 |
|
|
|
36,610 |
|
|
|
2,810 |
|
|
|
7.68 |
|
|
|
35,895 |
|
|
|
2,658 |
|
|
|
7.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,856,675 |
|
|
|
74,863 |
|
|
|
4.03 |
|
|
|
1,768,939 |
|
|
|
88,624 |
|
|
|
5.01 |
|
|
|
1,663,391 |
|
|
|
75,673 |
|
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
108,584 |
|
|
|
|
|
|
|
|
|
|
|
115,172 |
|
|
|
|
|
|
|
|
|
|
|
115,390 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
19,286 |
|
|
|
|
|
|
|
|
|
|
|
23,838 |
|
|
|
|
|
|
|
|
|
|
|
18,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,984,545 |
|
|
|
|
|
|
|
|
|
|
|
1,907,949 |
|
|
|
|
|
|
|
|
|
|
|
1,797,152 |
|
|
|
|
|
|
|
|
|
Average equity |
|
|
172,777 |
|
|
|
|
|
|
|
|
|
|
|
175,897 |
|
|
|
|
|
|
|
|
|
|
|
162,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and equity |
|
$ |
2,157,322 |
|
|
|
|
|
|
|
|
|
|
$ |
2,083,846 |
|
|
|
|
|
|
|
|
|
|
$ |
1,959,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income |
|
|
|
|
|
$ |
47,429 |
|
|
|
|
|
|
|
|
|
|
$ |
56,757 |
|
|
|
|
|
|
|
|
|
|
$ |
62,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate spread |
|
|
|
|
|
|
|
|
|
|
1.91 |
% |
|
|
|
|
|
|
|
|
|
|
2.33 |
% |
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
margin |
|
|
|
|
|
|
|
|
|
|
2.30 |
% |
|
|
|
|
|
|
|
|
|
|
2.87 |
% |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 over 2007 |
|
|
2007 over 2006 |
|
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
Increase (decrease) in interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities |
|
$ |
645,000 |
|
|
$ |
334,000 |
|
|
$ |
311,000 |
|
|
$ |
686,000 |
|
|
$ |
662,000 |
|
|
$ |
24,000 |
|
Tax exempt securities |
|
|
167,000 |
|
|
|
348,000 |
|
|
|
(181,000 |
) |
|
|
83,000 |
|
|
|
136,000 |
|
|
|
(53,000 |
) |
Loans |
|
|
(23,672,000 |
) |
|
|
4,713,000 |
|
|
|
(28,385,000 |
) |
|
|
6,215,000 |
|
|
|
7,984,000 |
|
|
|
(1,769,000 |
) |
Short term investments |
|
|
(13,000 |
) |
|
|
(4,000 |
) |
|
|
(9,000 |
) |
|
|
8,000 |
|
|
|
7,000 |
|
|
|
1,000 |
|
Federal funds sold |
|
|
(216,000 |
) |
|
|
121,000 |
|
|
|
(337,000 |
) |
|
|
(62,000 |
) |
|
|
(76,000 |
) |
|
|
14,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in tax-equivalent
income |
|
|
(23,089,000 |
) |
|
|
5,512,000 |
|
|
|
(28,601,000 |
) |
|
|
6,930,000 |
|
|
|
8,713,000 |
|
|
|
(1,783,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
(555,000 |
) |
|
|
139,000 |
|
|
|
(694,000 |
) |
|
|
(22,000 |
) |
|
|
18,000 |
|
|
|
(40,000 |
) |
Savings deposits |
|
|
(2,055,000 |
) |
|
|
(599,000 |
) |
|
|
(1,456,000 |
) |
|
|
(351,000 |
) |
|
|
(246,000 |
) |
|
|
(105,000 |
) |
Money market accounts |
|
|
(167,000 |
) |
|
|
59,000 |
|
|
|
(226,000 |
) |
|
|
34,000 |
|
|
|
43,000 |
|
|
|
(9,000 |
) |
Time deposits |
|
|
(13,632,000 |
) |
|
|
(2,673,000 |
) |
|
|
(10,959,000 |
) |
|
|
11,805,000 |
|
|
|
4,644,000 |
|
|
|
7,161,000 |
|
Short term borrowings |
|
|
(1,472,000 |
) |
|
|
144,000 |
|
|
|
(1,616,000 |
) |
|
|
626,000 |
|
|
|
652,000 |
|
|
|
(26,000 |
) |
Federal Home Loan Bank
advances |
|
|
4,454,000 |
|
|
|
5,927,000 |
|
|
|
(1,473,000 |
) |
|
|
707,000 |
|
|
|
(137,000 |
) |
|
|
844,000 |
|
Long term borrowings |
|
|
(334,000 |
) |
|
|
655,000 |
|
|
|
(989,000 |
) |
|
|
152,000 |
|
|
|
53,000 |
|
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in interest
expense |
|
|
(13,761,000 |
) |
|
|
3,651,000 |
|
|
|
(17,412,000 |
) |
|
|
12,951,000 |
|
|
|
5,027,000 |
|
|
|
7,924,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in tax-equivalent
net interest income |
|
$ |
9,328,000 |
|
|
$ |
1,861,000 |
|
|
$ |
(11,189,000 |
) |
|
$ |
(6,021,000 |
) |
|
$ |
3,686,000 |
|
|
$ |
(9,707,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income is primarily generated from the loan and lease portfolio, and to a lesser degree,
from securities, federal funds sold, and short term investments. Interest income decreased $23.1
million during 2008 from that earned in 2007, totaling $122.3 million in 2008 compared to $145.4
million in the previous year. The decrease is primarily due to the lower interest rate environment
and increased level of nonperforming assets during 2008 when compared to 2007, which more than
offset the growth in average earning assets year over year. The yield on average earning assets
declined from 7.34% in 2007 to 5.94% in 2008.
During 2008, average earning assets increased $79.4 million, from $1,979.6 million in 2007 to
$2,059.0 million during 2008. Growth in average total loans and leases, totaling $64.2 million,
comprised 80.9% of the increase in average earning assets during 2008. Interest income generated
from the loan and lease portfolio decreased $23.7 million in 2008 compared to the level earned in
2007; a decline in loan yield from 7.57% in 2007 to 6.01% in 2008 resulted in a $28.4 million
reduction in interest income while growth in the loan and lease portfolio during 2008 resulted in a
$4.7 million increase in interest income. The decrease in the loan and lease portfolio yield is
primarily due to a lower interest rate environment during 2008 than in 2007 and an increase in
nonperforming loans.
Interest income generated from the securities portfolio increased in 2008 compared to the level
earned in 2007 as a result of growth in the portfolio and an increased yield. Average securities
increased by $12.1 million in 2008, increasing from $205.4 million in 2007 to $217.5 million in
2008. The growth equated to an increase in interest income of $0.7 million. The improved yield,
which equaled 5.55% in 2008 compared to 5.48% in 2007, resulted in a $0.1 million increase in
interest income. Interest income earned on federal funds sold decreased by $0.2 million due to a
decline in the average rate, which more than offset an increase in the average balance.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree,
from repurchase agreements, FHLB advances, and subordinated debentures. Interest expense decreased
$13.7 million during 2008 from that expensed in 2007, totaling $74.9 million in 2008 compared to
$88.6 million in the previous year. The decline in interest expense is primarily attributable to a
decreased cost of funds, which mainly resulted from maturing fixed rate certificates of deposit and
borrowings being renewed or replaced at lower interest rates, reflecting the decreased interest
rate environment in 2008. Interest-bearing liabilities averaged $1,856.7 million during 2008, or
$87.8 million higher than the average interest-bearing liabilities of $1,768.9 million during 2007.
This growth resulted in increased interest expense of $3.7 million. A decline in interest expense
of $17.4 million was recorded during 2008 due to a decreased cost of funds primarily attributable
to lower average rates paid on fixed rate certificates of deposit and borrowings. The cost of
average interest-bearing liabilities decreased from the 5.01% recorded in 2007 to 4.03% in 2008.
F-18
Average certificates of deposit declined $53.2 million during 2008, which equated to a decrease in
interest expense of $2.7 million. An additional $10.9 million reduction in interest expense
resulted from a decrease in the average rate paid as higher-rate certificates of deposit matured
and were either renewed or replaced with lower-costing certificates of deposit throughout 2008. A
decline in other average interest-bearing deposit accounts, totaling $13.1 million, equated to a
decrease in interest expense of $0.4 million, with an additional interest expense reduction of $2.4
million recorded due to a decrease in the average rate paid during 2008.
Average short-term borrowings, primarily comprised of repurchase agreements and federal funds
purchased, increased $4.0 million during 2008, resulting in increased interest expense of $0.1
million, while a decrease in the
average rate paid during 2008 resulted in a reduction in interest expense of $1.6 million. Average
FHLB advances increased $140.0 million, equating to an increase in interest expense of $5.9
million, while a decreased average rate paid on the advances resulted in a $1.5 million reduction
in interest expense. Growth in average long-term borrowings, which is comprised of subordinated
debentures, structured repurchase agreements, and deferred director and officer compensation
programs, equated to an increase in interest expense of $0.7 million during 2008, with a decreased
average rate reducing interest expense by $1.0 million.
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $21.2 million in 2008, compared to the $11.1
million expensed in 2007. The increase primarily reflects a higher volume of nonperforming loans
and leases, increased net loan charge-offs, and other downgrades within our commercial loan and
lease portfolio, necessitating a higher allowance balance. Nonperforming loans and leases totaled
$49.3 million, or 2.66% of total loans and leases, as of December 31, 2008, compared to $29.8
million, or 1.66% of total loans and leases, as of December 31, 2007. Net loan and lease
charge-offs during 2008 totaled $19.9 million, or 1.09% of average total loans and leases. Net
loan and lease charge-offs during 2007 totaled $6.7 million, or 0.38% of average total loans and
leases. Loan and lease growth during 2008 equaled $57.0 million, compared to loan and lease growth
of $54.4 million during 2007. The allowance as a percentage of total loans outstanding as of
December 31, 2008 was 1.46%, compared to 1.43% at year-end 2007. Although we believe the allowance
is adequate to cover losses as they arise, there can be no assurance that we will not sustain
losses in any given period that could be substantial in relation to, or greater than, the size of
the allowance.
In each accounting period, we adjust the allowance to the amount we believe is necessary to
maintain the allowance at adequate levels. Through the loan and lease review and credit
departments, we attempt to allocate specific portions of the allowance based on specifically
identifiable problem loans and leases. The evaluation of the allowance is further based on, but
not limited to, consideration of the internally prepared Reserve Analysis, composition of the loan
and lease portfolio, third party analysis of the loan and lease administration processes and
portfolio and general economic conditions. In addition, the historically strong commercial loan
and lease growth and expansions into new markets are taken into account.
The Reserve Analysis, used since our inception and completed monthly, applies reserve allocation
factors to outstanding loan and lease balances to calculate an overall allowance dollar amount.
For commercial loans and leases, which continue to comprise a vast majority of our total loans and
leases, reserve allocation factors are based upon the loan ratings as determined by our
standardized grade paradigms. For retail loans, reserve allocation factors are based upon the type
of credit. Adjustments for specific lending relationships, including impaired loans and leases,
are made on a case-by-case basis. The reserve allocation factors are primarily based on the recent
levels and historical trends of net loan charge-offs and non-performing assets, the comparison of
the recent levels and historical trends of net loan charge-offs and non-performing assets with a
customized peer group consisting of ten similarly-sized publicly traded banking organizations
conducting business in the states of Michigan, Illinois, Indiana or Ohio, the review and
consideration of our loan and lease migration analysis and the experience of senior management
making similar loans and leases for an extensive period of time. We regularly review the Reserve
Analysis and make adjustments periodically based upon identifiable trends and experience.
F-19
Noninterest Income
Noninterest income totaled $7.3 million in 2008, an increase of $1.4 million from the $5.9 million
earned in 2007. Service charge income on deposits and repurchase agreements increased $0.4 million
during 2008 when compared to 2007, primarily reflecting a decrease in the earnings credit rate and
improved collection of overdraft service charges. Earnings from the increased cash surrender value
of bank owned life insurance policies, primarily reflecting additional investments during the year
and improved yields, increased $0.5 million in 2008. Residential mortgage banking fees increased
$0.2 million in 2008 due to a higher volume of activity. We recorded increases in virtually all
other fee income-producing activities in 2008 when compared to 2007 primarily due to increased
volumes.
Noninterest Expense
Noninterest expense during 2008 totaled $42.1 million, an increase of $3.7 million over the $38.4
million expensed in 2007. Salary expense and benefit costs decreased $0.4 million in 2008 when
compared to 2007. Included in 2007 salary and benefit costs is a one-time $1.2 million expense
associated with the financial retirement package for former Chairman and Chief Executive Officer,
Gerald R. Johnson, Jr., in conjunction with Mr. Johnsons retirement effective June 30, 2007.
Salary expense and benefit costs increased $0.8 million in 2008 if this one-time expense is
excluded from 2007 salary and benefit costs; the resulting increase primarily reflects annual pay
increases and the hiring of additional staff related to our expansion into Oakland County in late
2007. Occupancy, furniture and equipment costs increased $0.4 million in 2008. Costs associated
with the administration and resolution of problem assets, including legal costs, property tax
payments, appraisal fees and write-downs on foreclosed properties, totaled $3.3 million in 2008
compared to $1.1 million in 2007. FDIC deposit insurance assessments totaled $1.9 million in 2008
compared to $0.7 million in 2007. The FDIC issued a final rule in December 2008 that uniformly
raised deposit insurance assessment rates for the first quarter of 2009 and indicated that another
final rule will be issued in early 2009 that will modify the current deposit insurance assessment
methodology. Our 2009 FDIC deposit insurance assessments may increase as a result of these changes
in methodology. Other non-interest expenses, in aggregate, increased $0.3 million in 2008 when
compared to 2007, reflecting additional expenditures required to administer an increased asset
base.
Federal Income Tax Expense
During 2008, we recorded a loss before federal income tax of $9.8 million and a federal income tax
benefit of $5.0 million, compared to net income before federal income tax of $12.0 million and
federal income tax expense of $3.0 million during 2007. Our effective tax rate for 2008 was
(49.6%), compared to 25.3% for 2007. The difference in the effective tax rate primarily reflects
the significant difference in income before federal income tax expense (benefit), and the
relationship of tax-exempt income to income (loss) before federal income tax expense (benefit).
SFAS No. 109, Accounting for Income Taxes, requires that companies assess whether a valuation
allowance should be established against their deferred tax assets based on the consideration of all
available evidence using a more likely than not standard. In accordance with SFAS No. 109, we
reviewed our deferred tax assets and determined that no valuation allowance was necessary at year
end 2008 or 2007. Despite the loss in 2008 and the challenging economic environment, we are in a
cumulative income position, have a history of strong earnings, are well-capitalized, and have
cautiously optimistic expectations regarding future taxable income. In making such judgments,
significant weight is given to evidence that can be objectively verified. In making decisions
regarding any valuation allowance, we consider both positive and negative evidence and analyze
changes in near-term market conditions as well as other factors which may impact future operating
results. The deferred tax assets will be analyzed quarterly for changes affecting realizability,
and there can be no guarantee that a valuation allowance will not be necessary in future periods.
F-20
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Summary
Net income during 2007 was $9.0 million, or $1.06 per basic and diluted share, compared to net
income of $19.8 million, or $2.36 per basic share and $2.33 per diluted share, recorded in 2006.
The $10.8 million decline in net income represents a decrease of 54.8%, while diluted earnings per
share were down 54.5%. The decline in net income during 2007 from that of 2006 is primarily the
result of lower net interest income and a higher provision for loan and lease losses. In addition,
net income during 2007 includes a one-time $1.2 million ($0.8 million after-tax) expense associated
with the financial retirement package for former Chairman and Chief Executive Officer, Gerald R.
Johnson Jr., which was recorded in conjunction with Mr. Johnsons retirement effective June 30,
2007. Excluding this one-time expense, net income for 2007 was $9.8 million, or $1.16 per basic
share and $1.15 per diluted share.
The following table shows some of the key performance and equity ratios for the years ended
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.43 |
% |
|
|
1.01 |
% |
Return on average shareholders equity |
|
|
5.10 |
|
|
|
12.19 |
|
Dividend payout ratio |
|
|
52.16 |
|
|
|
20.34 |
|
Average shareholders equity to average assets |
|
|
8.44 |
|
|
|
8.31 |
|
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest
cost of funding those assets, is our primary source of earnings. Interest income (adjusted for
tax-exempt income) and interest expense totaled $145.4 million and $88.6 million during 2007,
respectively, providing for net interest income of $56.8 million. During 2006, interest income and
interest expense were $138.5 million and $75.7 million, respectively, providing for net interest
income of $62.8 million. In comparing 2007 with 2006, interest income increased 5.0%, interest
expense was up 17.1% and net interest income decreased 9.6%. The level of net interest income is
primarily a function of asset size, as the weighted average interest rate received on earning
assets is greater than the weighted average interest cost of funding sources; however, factors such
as types and levels of assets and liabilities, interest rate environment, interest rate risk, asset
quality, liquidity, and customer behavior also impact net interest income as well as the net
interest margin.
The net interest margin declined from 3.37% in 2006 to 2.87% in 2007, a decrease of 14.8%. Our net
interest margin during 2005 was 3.50%. Throughout 2005 and during the first half of 2006, our net
interest margin was generally on an increasing trend. From June 2004 through June 2006, the FOMC
increased the federal funds rate by 25 basis points at 17 consecutive meetings, causing the prime
rate to increase from 4.00% in June 2004 to 8.25% in June 2006. Our yield on assets increased
significantly during this time period, as the interest rates on over 70% of our total loans and
leases were tied to the prime rate. Our cost of funds also increased during this time period, as
interest rates paid on our deposits and borrowings increased as well. However, our cost of funds
increased at a slower rate than the increase in our yield on assets, with a significant portion of
our interest-bearing liabilities comprised of fixed rate certificates of deposit and borrowings,
resulting in a lagged increased cost of funds.
From the period of June 2006 through September 2007, the FOMC left the federal funds rate
unchanged, resulting in a relatively steady yield on assets. However, our cost of funds continued
to increase as maturing fixed rate certificates of deposit and borrowings, which were obtained
during lower interest rate environments, were replaced or renewed at higher interest rates,
resulting in a declining net interest margin. In September 2007, the FOMC started to aggressively
lower the federal funds rate with three interest rate reductions totaling 100 basis points through
the end of 2007, causing the prime rate to decline from 8.25% to 7.25%. With about 60% of our
total loans and leases tied to the prime rate and a significant portion of our interest-bearing
liabilities comprised of fixed rate certificates of deposit and borrowings, our asset yield
declined at a much faster rate than our cost of funds, resulting in further compression of our net
interest margin.
F-21
Also negatively impacting our net interest margin during 2007 was an increase in nonperforming
assets, with a higher level of loans on nonaccrual status and a higher balance of foreclosed
properties than in previous periods. A very competitive loan and deposit pricing environment,
combined with a continuation of a flat to inverted yield curve, also negatively impacted our net
interest margin.
Interest income is primarily generated from the loan and lease portfolio, and to a lesser degree
from securities, federal funds sold and short term investments. Interest income increased $6.9
million during 2007 from that earned in 2006, totaling $145.4 million in 2007 compared to $138.5
million in the previous year. The increase is primarily due to the growth in earning assets, which
more than offset the lower interest rate environment and increased level of nonperforming assets
during 2007 when compared to 2006. The yield on average earning assets declined from 7.44%
recorded in 2006 to 7.34% in 2007.
During 2007, average earning assets increased $118.9 million, from $1,860.7 million in 2006 to
$1,979.6 million during 2007. Growth in average total loans and leases, totaling $105.2 million,
comprised 88.5% of the increase in average earning assets during 2007. Interest income generated
from the loan and lease portfolio increased $6.2 million during 2007 over the level earned in 2006,
comprised of an increase of $8.0 million from the growth in the loan and lease portfolio and a
decrease of $1.8 million due to a decline in the yield earned on the loan portfolio to 7.57% from
7.68%. The decrease in the loan and lease portfolio yield is primarily due to a lower interest
rate environment during 2007 than in 2006 and an increase in nonperforming loans.
Growth in the securities portfolio also added to the increase in interest income during 2007 over
that of 2006. Average securities increased by $15.1 million in 2007, increasing from $190.3
million in 2006 to $205.4 million in 2007. The growth equated to an increase in interest income of
$0.8 million. The yield earned on the securities portfolio decreased slightly during 2007, from
5.51% to 5.48%. Interest income earned on federal funds sold decreased by $0.1 million due to a
small decline in the average balance during 2007.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree from
repurchase agreements, FHLB advances and subordinated debentures. Interest expense increased $12.9
million during 2007 from that expensed in 2006, totaling $88.6 million in 2007 compared to $75.7
million in the previous year. The increase in interest expense is primarily attributable to the
impact of an increase in interest-bearing liabilities and an increased cost of funds associated
with the renewal and replacement of maturing fixed rate certificates of deposit and borrowings in
2007 that were obtained during periods of lower interest rates when compared to the interest rate
environment during 2007. Interest-bearing liabilities averaged $1,768.9 million during 2007, or
$105.5 million higher than the average interest-bearing liabilities of $1,663.4 million during
2006. This growth resulted in increased interest expense of $5.0 million. An increase in interest
expense of $7.9 million was recorded during 2007 primarily due to an increased cost of funds
primarily attributable to fixed rate certificates of deposit and borrowings. The cost of average
interest-bearing liabilities increased from the 4.55% recorded in 2006 to 5.01% in 2007.
Average certificate of deposit growth during 2007 of $95.5 million equated to an increase in
interest expense of $4.6 million, with an additional $7.2 million expensed due to the increase in
the average rate paid as lower-rate certificates of deposit matured and were either renewed or
replaced with higher-costing certificates of deposit throughout 2007. A decline in other average
interest-bearing deposit accounts, totaling $5.0 million, equated to a decrease in interest expense
of $0.2 million, with an additional interest expense reduction of $0.2 million recorded due to a
decrease in the average rate paid during 2007.
Average short term borrowings, comprised of repurchase agreements and federal funds purchased,
increased $17.4 million during 2007, resulting in increased interest expense of $0.7 million, with
a slight reduction in interest expense due to a decrease in the average rate paid during 2007.
Average FHLB advances decreased $3.0 million, equating to a decrease in interest expense of $0.1
million; however, an increased average rate added $0.8 million to interest expense. Growth in
average long-term borrowings, comprised of subordinated debentures
and deferred director and
officer compensation programs, equated to an increase in interest expense of less than $0.1 million
during 2007, with an increased average rate adding $0.1 million to interest expense.
F-22
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $11.1 million during 2007, compared to the $5.8
million expensed during 2006. The increase primarily reflects a higher volume of nonperforming
loans and leases and other downgrades within our commercial loan and lease portfolio, necessitating
a higher allowance balance. Nonperforming loans and leases totaled $29.8 million, or 1.66% of
total loans and leases, as of December 31, 2007, compared to $8.6 million, or 0.49% of total loans
and leases, as of December 31, 2006. Net loan and lease charge-offs during 2007 totaled $6.7
million, or 0.38% of average total loans and leases. Net loan and lease charge-offs during 2006
totaled $4.9 million, or 0.29% of average total loans and leases. Loan and lease growth during
2007 equaled $54.4 million, compared to loan and lease growth of $183.7 million during 2006. The
allowance as a percentage of total loans outstanding as of December 31, 2007 was 1.43%, compared to
1.23% at year-end 2006.
In each accounting period, we adjust the allowance to the amount we believe is necessary to
maintain the allowance at adequate levels. Through the loan and lease review and credit
departments, we attempt to allocate specific portions of the allowance based on specifically
identifiable problem loans and leases. The evaluation of the allowance is further based on, but
not limited to, consideration of the internally prepared Reserve Analysis, composition of the loan
and lease portfolio, third party analysis of the loan and lease administration processes and
portfolio and general economic conditions. In addition, the historically strong commercial loan
and lease growth and expansions into new markets are taken into account.
Noninterest Income
Noninterest income totaled $5.9 million in 2007, an increase of $0.6 million from the $5.3 million
earned in 2006. Service charge income on deposits and repurchase agreements increased $0.2
million during 2007 when compared to 2006, reflecting an increase in the number of deposit accounts
and modest increases in our fee structure. Earnings from increased cash surrender value of bank
owned life insurance policies increased $0.1 million in 2007, primarily reflecting a higher balance
from the purchase of additional policies during the year. We recorded increases in virtually all
other fee income-producing activities in 2007 when compared to 2006, with the exception of
residential mortgage banking fees, which decreased $0.1 million due to a lower volume of activity.
Noninterest Expense
Noninterest expense during 2007 totaled $38.4 million, an increase of $6.1 million over the $32.3
million expensed in 2006. Salary expense and benefit costs increased $3.9 million in 2007 when
compared to 2006. Included in 2007 salary and benefit costs is a one-time $1.2 million expense
associated with the financial retirement package for former Chairman and Chief Executive Officer,
Gerald R. Johnson, Jr., in conjunction with Mr. Johnsons retirement effective June 30, 2007. The
remainder of the increase in salary and benefit costs during 2007 primarily reflects the increase
in full-time equivalent employees from 291 at year-end 2006 to 306 at year-end 2007 and annual pay
increases. Occupancy, furniture and equipment costs increased $0.2 million in 2007. Other
non-interest expenses, in aggregate, increased $2.0 million in 2007 when compared to 2006,
reflecting increased costs associated with a higher level of nonperforming assets, higher FDIC
insurance premiums and additional expenditures required to administer an increased asset base.
Federal Income Tax Expense
Federal income tax expense was $3.0 million in 2007, a decrease of $6.0 million from the $9.0
million expensed during 2006. The decrease during 2007 is primarily due to the decline in our
pre-federal income tax profitability. Our effective tax rate for 2007 was 25.3%, compared to 31.1%
in 2006, reflecting a decrease in taxable income and the related increase in tax-exempt income as a
percent of taxable income.
CAPITAL RESOURCES
Shareholders equity is a noninterest-bearing source of funds that generally provides support for
our asset growth. Shareholders equity was $174.4 million and $178.2 million at December 31, 2008
and 2007,
respectively. The $3.8 million decline during 2008 is primarily attributable to net loss from
operations, which totaled $5.0 million. Also negatively impacting shareholders equity during 2008
was the payment of cash dividends, which totaled $2.6 million. Positively impacting shareholders
equity was unrealized gains for a $1.8 million, net of tax, adjustment for available for sale
securities as defined in SFAS No. 115, and a $1.2 million, net of tax, change in the fair value of
interest rate swaps.
F-23
We and our bank are subject to regulatory capital requirements administered by state and federal
banking agencies. Failure to meet the various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements. Our and our banks capital
ratios as of December 31, 2008 and 2007 are disclosed in Note 18 of the Notes to Consolidated
Financial Statements.
Our ability to pay cash and stock dividends is subject to limitations under various laws and
regulations and to prudent and sound banking practices. During 2008, we paid a cash dividend on
our common stock each calendar quarter. However, reflecting our financial results and the poor and
weakening economy, we lowered the dollar amount of the cash dividends paid during 2008. During the
first quarter of 2008, our cash dividend was $0.15 per share, but that was lowered to $0.08 per
share during the second quarter and $0.04 per share during the third and fourth quarters. The
reduction of the cash dividends during 2008 had a positive impact on our capital ratios. On
January 8, 2009, we declared a $0.04 per common share cash dividend that will be paid on March 10,
2009 to shareholders of record on February 10, 2009.
LIQUIDITY
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or
cash flow from the repayment of loans and investment securities. These funds are used to fund
loans, meet deposit withdrawals, maintain reserve requirements and operate our company. Liquidity
is primarily achieved through the growth of local and out-of-area deposits and liquid assets such
as securities available for sale, matured securities and federal funds sold. Asset and liability
management is the process of managing the balance sheet to achieve a mix of earning assets and
liabilities that maximizes profitability, while providing adequate liquidity.
Our liquidity strategy is to fund loan growth with deposits, repurchase agreements and FHLB
advances, and to maintain an adequate level of short- and medium-term investments to meet typical
daily loan and deposit activity. Although deposit and repurchase agreement growth from customers
located in our market areas has historically generally increased, this growth has not been
sufficient to meet our historical substantial loan growth and provide monies for additional
investing activities. To assist in providing the additional needed funds, we have regularly
obtained monies from wholesale funding sources. Wholesale funds, comprised of certificates of
deposit from customers outside of our market areas and advances from the FHLB, totaled $1,414.2
million, or 71.5% of combined deposits and borrowed funds as of December 31, 2008, compared to
$1,105.0 million, or 58.7% of combined deposits and borrowed funds as of December 31, 2007.
Although local deposits have historically generally increased as new business, municipal
governmental unit and individual deposit relationships are established and as existing customers
increase the balances in their accounts, the relatively high reliance on wholesale funds will
likely remain. As part of our interest rate risk management strategy, a majority of our wholesale
funds have a fixed rate and mature within one year, reflecting the fact that a majority of our
loans and leases have a floating interest rate tied to either the Prime or LIBOR rates. While this
strategy increases inherent liquidity risk, we believe the increased liquidity risk is sufficiently
mitigated by the benefits derived from an interest rate risk management standpoint. In addition,
we have developed a comprehensive contingency funding plan which we believe further mitigates the
increased liquidity risk.
Wholesale funds are generally a lower all-in cost source of funds when compared to the interest
rates that would have to be offered in the local markets to generate a commensurate level of funds.
Interest rates paid on new out-of-area deposits and FHLB advances have historically been similar
to interest rates paid on new certificates of deposit issued to local customers. In addition, the
overhead costs associated with wholesale funds are considerably less than the overhead costs that
would be incurred to attract and administer a similar level of local deposits, especially if the
estimated costs of a needed expanded branching network were taken into account. We believe the
relatively low overhead costs reflecting our limited branch network mitigate our high reliance on
wholesale funds and resulting relatively low net interest margin.
F-24
As a member of the Federal Home Loan Bank of Indianapolis, our bank has access to the FHLB advance
borrowing programs. Advances totaled $270.0 million as of December 31, 2008, compared to $180.0
million outstanding as of December 31, 2007. Based on available collateral as of December 31,
2008, we could borrow an additional $37.0 million. Our bank also has the ability to borrow up to
$30.0 million on a daily basis through a correspondent bank using an established unsecured federal
funds purchased line. During 2008, our federal funds purchased position averaged $4.2 million,
compared to an average federal funds sold position of $11.4 million. Given the volatile market
conditions, during the fourth quarter of 2008 we made the decision to operate with a higher than
normal balance of federal funds sold. It is expected that we will maintain the higher balance of
federal funds sold, likely to average 1.0% to 1.5% of average earning assets, until market
conditions return to more normalized levels. As a result, we expect the use of our federal funds
purchased line of credit, in at least the near future, will be rare, if at all.
During 2008 our bank established a line of credit through the Discount Window of the Federal
Reserve Bank of Chicago. Using a substantial majority of our tax-exempt municipal securities as
collateral, at year-end 2008 we could have borrowed up to about $60.0 million for terms of 1 to 28
days, or up to about $45.0 million for terms of 29 to 90 days. We do not plan to regularly access
this line of credit.
The following table reflects, as of December 31, 2008, significant fixed and determinable
contractual obligations to third parties by payment date, excluding accrued interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year |
|
One to |
|
Three to |
|
Over Five |
|
|
|
|
or Less |
|
Three Years |
|
Five Years |
|
Years |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without a stated maturity |
|
$ |
235,789,000 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
235,789,000 |
|
Certificates of deposits |
|
|
1,179,405,000 |
|
|
|
167,415,000 |
|
|
|
16,966,000 |
|
|
|
0 |
|
|
|
1,363,786,000 |
|
Short term borrowings |
|
|
94,413,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
94,413,000 |
|
Federal Home Loan Bank advances |
|
|
70,000,000 |
|
|
|
150,000,000 |
|
|
|
50,000,000 |
|
|
|
0 |
|
|
|
270,000,000 |
|
Subordinated debentures |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
32,990,000 |
|
|
|
32,990,000 |
|
Other borrowed money |
|
|
0 |
|
|
|
15,000,000 |
|
|
|
0 |
|
|
|
4,528,000 |
|
|
|
19,528,000 |
|
Operating leases |
|
|
329,000 |
|
|
|
432,000 |
|
|
|
168,000 |
|
|
|
0 |
|
|
|
929,000 |
|
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands
of certain unfunded loan commitments and standby letters of credit. At December 31, 2008, we had a
total of $379.7 million in unfunded loan commitments and $51.4 million in unfunded standby letters
of credit. Of the total unfunded loan commitments, $368.7 million were commitments available as
lines of credit to be drawn at any time as customers cash needs vary, and $11.0 million were for
loan commitments scheduled to close and become funded within the next twelve months. The level of
commitments to make loans has declined significantly when compared to historical level, primarily
reflecting relatively poor economic conditions. We monitor fluctuations in loan balances and
commitment levels, and include such data in our overall liquidity management.
The following table depicts our loan commitments at the end of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial unused lines of credit |
|
$ |
323,785,000 |
|
|
$ |
377,493,000 |
|
|
$ |
345,195,000 |
|
Unused lines of credit secured by
1-4 family residential
properties |
|
|
30,658,000 |
|
|
|
33,083,000 |
|
|
|
29,314,000 |
|
Credit card unused lines of credit |
|
|
9,413,000 |
|
|
|
9,035,000 |
|
|
|
8,510,000 |
|
Other consumer unused lines of credit |
|
|
4,881,000 |
|
|
|
6,910,000 |
|
|
|
7,197,000 |
|
Commitments to make loans |
|
|
10,959,000 |
|
|
|
66,196,000 |
|
|
|
60,850,000 |
|
Standby letters of credit |
|
|
51,439,000 |
|
|
|
81,292,000 |
|
|
|
73,241,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
431,135,000 |
|
|
$ |
574,009,000 |
|
|
$ |
524,307,000 |
|
F-25
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that
unexpected events, economic or market conditions, reduction in earnings performance, declining
capital levels or situations beyond our control could either cause short term or long term
liquidity challenges. While we believe it is unlikely that a funding crisis of any significant
degree is likely to materialize, we have developed a comprehensive contingency funding plan that
provides a framework for meeting both temporary and longer-term liquidity disruptions. Depending
on the particular circumstances of a liquidity situation, possible strategies may include obtaining
funds via one or a combination of the following sources of funds: established lines of credit at
correspondent banks, the FHLB and the Federal Reserve Bank of Chicago, brokered certificate of
deposit market, wholesale securities repurchase markets, issuance of term debt, common or preferred
stock, or sale of securities or other assets.
MARKET RISK ANALYSIS
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk.
All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure.
We have only limited agricultural-related loan assets and therefore have no significant exposure
to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity
prices would have on interest rates is assumed to be insignificant. Interest rate risk is the
exposure of our financial condition to adverse movements in interest rates. We derive our income
primarily from the excess of interest collected on interest-earning assets over the interest paid
on interest-bearing liabilities. The rates of interest we earn on our assets and owe on our
liabilities generally are established contractually for a period of time. Since market interest
rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate
changes. Accepting interest rate risk can be an important source of profitability and shareholder
value; however, excessive levels of interest rate risk could pose a significant threat to our
earnings and capital base. Accordingly, effective risk management that maintains interest rate
risk at prudent levels is essential to our safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the
process used to control interest rate risk and the quantitative level of exposure. Our interest
rate risk management process seeks to ensure that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of interest rate
risk, we assess the existing and potential future effects of changes in interest rates on our
financial condition, including capital adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurement techniques. The first, which is commonly referred to as
GAP analysis, measures the difference between the dollar amounts of interest-sensitive assets and
liabilities that will be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to the net interest margin during periods of
changing market interest rates.
F-26
The following table depicts our GAP position as of December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
Three to |
|
|
One to |
|
|
After |
|
|
|
|
|
|
Three |
|
|
Twelve |
|
|
Five |
|
|
Five |
|
|
|
|
|
|
Months |
|
|
Months |
|
|
Years |
|
|
Years |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans (1) |
|
$ |
731,445 |
|
|
$ |
212,433 |
|
|
$ |
702,801 |
|
|
$ |
61,629 |
|
|
$ |
1,708,308 |
|
Leases |
|
|
23 |
|
|
|
120 |
|
|
|
1,842 |
|
|
|
0 |
|
|
|
1,985 |
|
Residential real estate loans |
|
|
52,208 |
|
|
|
16,871 |
|
|
|
57,214 |
|
|
|
14,483 |
|
|
|
140,776 |
|
Consumer loans |
|
|
2,350 |
|
|
|
97 |
|
|
|
2,808 |
|
|
|
591 |
|
|
|
5,846 |
|
Securities (2) |
|
|
38,942 |
|
|
|
1,884 |
|
|
|
43,153 |
|
|
|
158,808 |
|
|
|
242,787 |
|
Federal funds sold |
|
|
8,950 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8,950 |
|
Short term investments |
|
|
100 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
100 |
|
Allowance for loan and lease losses |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(27,108 |
) |
Other assets |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
126,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
834,018 |
|
|
|
231,405 |
|
|
|
807,818 |
|
|
|
235,511 |
|
|
|
2,208,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
|
|
50,248 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
50,248 |
|
Savings |
|
|
49,943 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
49,943 |
|
Money market accounts |
|
|
24,886 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
24,886 |
|
Time deposits under $100,000 |
|
|
59,325 |
|
|
|
82,272 |
|
|
|
37,342 |
|
|
|
0 |
|
|
|
178,939 |
|
Time deposits $100,000 and over |
|
|
377,341 |
|
|
|
660,467 |
|
|
|
147,039 |
|
|
|
0 |
|
|
|
1,184,847 |
|
Short term borrowings |
|
|
94,413 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
94,413 |
|
Federal Home Loan Bank advances |
|
|
15,000 |
|
|
|
55,000 |
|
|
|
200,000 |
|
|
|
0 |
|
|
|
270,000 |
|
Long term borrowings |
|
|
37,518 |
|
|
|
0 |
|
|
|
15,000 |
|
|
|
0 |
|
|
|
52,518 |
|
Noninterest-bearing checking |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
110,712 |
|
Other liabilities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
17,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
708,674 |
|
|
|
797,739 |
|
|
|
399,381 |
|
|
|
0 |
|
|
|
2,033,638 |
|
Shareholders equity |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
174,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources of funds |
|
|
708,674 |
|
|
|
797,739 |
|
|
|
399,381 |
|
|
|
0 |
|
|
|
2,208,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) GAP |
|
$ |
125,344 |
|
|
$ |
(566,334 |
) |
|
$ |
408,437 |
|
|
$ |
235,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP |
|
$ |
125,344 |
|
|
$ |
(440,990 |
) |
|
$ |
(32,553 |
) |
|
$ |
202,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of cumulative GAP to
total assets |
|
|
5.7 |
% |
|
|
(20.0 |
)% |
|
|
(1.5 |
)% |
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Floating rate loans that are currently at interest rate ceilings or interest rate
floors are treated as fixed rate loans and are reflected using maturity date and not repricing
frequency. |
|
(2) |
|
Mortgage-backed securities are categorized by expected maturities based upon
prepayment trends as of December 31, 2008. |
The second interest rate risk measurement used is commonly referred to as net interest income
simulation analysis. We believe that this methodology provides a more accurate measurement of
interest rate risk than the GAP analysis, and therefore, it serves as our primary interest rate
risk measurement technique. The simulation model assesses the direction and magnitude of
variations in net interest income resulting from potential changes in market interest rates. Key
assumptions in the model include prepayment speeds on various loan and investment assets; cash
flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions
impacting loan and deposit
volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and
revision in a dynamic environment; therefore, the model cannot precisely estimate net interest
income or exactly predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and frequency of
interest rate changes and changes in market conditions and our strategies, among other factors.
F-27
We conducted multiple simulations as of December 31, 2008, in which it was assumed that changes in
market interest rates occurred ranging from up 200 basis points to down 200 basis points in equal
quarterly instalments over the next twelve months. The following table reflects the suggested
impact on net interest income over the next twelve months in comparison to estimated net interest
income based on our balance sheet structure, including the balances and interest rates associated
with our specific loans, securities, deposits and borrowed funds, as of December 31, 2008. The
resulting estimates are well within our policy parameters established to manage and monitor
interest rate risk.
|
|
|
|
|
|
|
|
|
|
|
Dollar Change In |
|
Percent Change In |
Interest Rate Scenario |
|
Net Interest Income |
|
Net Interest Income |
Interest rates down 200 basis points |
|
$ |
8,298,000 |
|
|
|
17.2 |
% |
Interest rates down 100 basis points |
|
|
7,935,000 |
|
|
|
16.5 |
|
No change in interest rates |
|
|
7,352,000 |
|
|
|
15.3 |
|
Interest rates up 100 basis points |
|
|
6,260,000 |
|
|
|
13.0 |
|
Interest rates up 200 basis points |
|
|
6,963,000 |
|
|
|
14.4 |
|
The resulting estimates have been significantly impacted by the current interest rate and economic
environment, as adjustments have been made to critical model inputs with regards to traditional
interest rate relationships. This is especially important as it relates to floating rate
commercial loans and brokered certificates of deposit, which comprise a substantial portion of our
balance sheet. As of December 31, 2008, the Mercantile Prime Rate is 4.50% as compared to the Wall
Street Journal Prime Rate of 3.25%. Historically, the two indices have been equal; however, we
elected not to reduce the Mercantile Prime Rate in late October and mid-December of 2008 when the
Wall Street Journal Prime Rate declined by 50 and 75 basis points, respectively. In conducting our
simulations at year-end 2008, we have made the assumption that the Mercantile Prime Rate will
remain unchanged until the Wall Street Journal Prime Rate exceeds the Mercantile Prime Rate, at
which time the two indices will remain equal in the increasing interest rate scenarios. We have
also made similar assumptions in regards to our local deposit rates, which in general have not been
reduced since the separation of the Mercantile and Wall Street Journal Prime Rate indices. Also,
brokered certificate of deposit rates have substantially decreased since December of 2008, with
part of the decline attributable to a significant imbalance whereby the supply of available funds
far outweighs the demand from banks looking to raise funds. As a result, we have substantially
limited further reductions in brokered certificate of deposit rates in the declining interest rate
scenarios.
In addition to changes in interest rates, the level of future net interest income is also dependent
on a number of other variables, including: the growth, composition and absolute levels of loans,
deposits, and other earning assets and interest-bearing liabilities; level of nonperforming assets;
economic and competitive conditions; potential changes in lending, investing, and deposit gathering
strategies; client preferences; and other factors.
F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation as of
December 31, 2008 and 2007, and the related consolidated statements of income, changes in
shareholders equity and cash flows for the years ended December 31, 2008 and 2007. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mercantile Bank Corporation as of December 31, 2008
and 2007, and the results of its operations and its cash flows for the years ended December 31,
2008 and 2007 in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Mercantile Bank Corporations internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 11, 2009 expressed an unqualified opinion thereon.
|
|
|
|
|
/s/ BDO Seidman, LLP
|
|
BDO Seidman, LLP |
|
Grand Rapids, Michigan
March 11, 2009
F-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated statements of income, changes in shareholders equity
and cash flows for the year ended December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of its operations and its cash flows for the year ended December 31,
2006 in conformity with U.S. generally accepted accounting principles.
|
|
|
|
|
/s/ Crowe Horwath LLP
|
|
Crowe Horwath LLP |
|
Grand Rapids, Michigan
February 20, 2007
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited Mercantile Bank Corporations internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Mercantile Bank Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report by Mercantile Bank Corporations
Management on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Mercantile Bank Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Mercantile Bank Corporation as of
December 31, 2008 and 2007, and the related consolidated statements of income, changes in
shareholders equity and cash flows for the years ended December 31, 2008 and 2007, and our report
dated March 11, 2009 expressed an unqualified opinion thereon.
|
|
|
|
|
|
|
/s/ BDO Seidman, LLP
|
|
BDO Seidman, LLP |
|
Grand Rapids, Michigan
March 11, 2009
F-31
March 11, 2009
REPORT BY MERCANTILE BANK CORPORATIONS MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control
over financial reporting presented in conformity with generally accepted accounting principles.
There are inherent limitations in the effectiveness of any system of internal control.
Accordingly, even an effective system of internal control can provide only reasonable assurance
with respect to financial statement preparation.
Management assessed the Companys system of internal control over financial reporting that is
designed to produce reliable financial statements in conformity with generally accepted accounting
principles as of December 31, 2008. This assessment was based on criteria for effective internal
control over financial reporting described in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 2008, Mercantile Bank Corporation maintained effective
control over financial reporting presented in conformity with generally accepted accounting
principles based on those criteria.
The Companys independent auditors have issued an audit report on the effectiveness of the
Companys internal control over financial reporting.
|
|
|
|
|
Mercantile Bank Corporation
|
|
/s/ Michael H. Price
|
|
Michael H. Price |
|
Chairman of the Board, President and Chief Executive Officer |
|
|
|
/s/ Charles E. Christmas
|
|
Charles E. Christmas |
|
Senior Vice President Chief Financial Officer and Treasurer |
|
|
F-32
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
16,754,000 |
|
|
$ |
29,138,000 |
|
Short-term investments |
|
|
100,000 |
|
|
|
292,000 |
|
Federal funds sold |
|
|
8,950,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
25,804,000 |
|
|
|
29,430,000 |
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
162,669,000 |
|
|
|
136,673,000 |
|
Securities held to maturity (fair value of $65,381,000 at
December 31, 2008 and $66,440,000 at December 31, 2007) |
|
|
64,437,000 |
|
|
|
65,330,000 |
|
Federal Home Loan Bank stock |
|
|
15,681,000 |
|
|
|
9,733,000 |
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
1,856,915,000 |
|
|
|
1,799,880,000 |
|
Allowance for loan and lease losses |
|
|
(27,108,000 |
) |
|
|
(25,814,000 |
) |
|
|
|
|
|
|
|
Loans and leases, net |
|
|
1,829,807,000 |
|
|
|
1,774,066,000 |
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
32,334,000 |
|
|
|
34,351,000 |
|
Bank owned life insurance policies |
|
|
42,462,000 |
|
|
|
39,118,000 |
|
Accrued interest receivable |
|
|
8,513,000 |
|
|
|
9,957,000 |
|
Other assets |
|
|
26,303,000 |
|
|
|
22,745,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,208,010,000 |
|
|
$ |
2,121,403,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
110,712,000 |
|
|
$ |
133,056,000 |
|
Interest-bearing |
|
|
1,488,863,000 |
|
|
|
1,458,125,000 |
|
|
|
|
|
|
|
|
Total |
|
|
1,599,575,000 |
|
|
|
1,591,181,000 |
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase |
|
|
94,413,000 |
|
|
|
97,465,000 |
|
Federal funds purchased |
|
|
0 |
|
|
|
13,800,000 |
|
Federal Home Loan Bank advances |
|
|
270,000,000 |
|
|
|
180,000,000 |
|
Subordinated debentures |
|
|
32,990,000 |
|
|
|
32,990,000 |
|
Other borrowed money |
|
|
19,528,000 |
|
|
|
4,013,000 |
|
Accrued interest and other liabilities |
|
|
17,132,000 |
|
|
|
23,799,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,033,638,000 |
|
|
|
1,943,248,000 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 1,000,000 shares
authorized, none issued |
|
|
0 |
|
|
|
0 |
|
Common stock, no par value; 20,000,000 shares
authorized; 8,593,304 and 8,527,197 shares issued
and outstanding at December 31, 2008 and 2007 |
|
|
172,353,000 |
|
|
|
172,938,000 |
|
Retained earnings (deficit) |
|
|
(1,281,000 |
) |
|
|
4,948,000 |
|
Accumulated other comprehensive income |
|
|
3,300,000 |
|
|
|
269,000 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
174,372,000 |
|
|
|
178,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,208,010,000 |
|
|
$ |
2,121,403,000 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-33
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, including fees |
|
$ |
110,013,000 |
|
|
$ |
133,685,000 |
|
|
$ |
127,470,000 |
|
Securities, taxable |
|
|
7,888,000 |
|
|
|
7,243,000 |
|
|
|
6,557,000 |
|
Securities, tax-exempt |
|
|
2,960,000 |
|
|
|
2,813,000 |
|
|
|
2,739,000 |
|
Federal funds sold |
|
|
204,000 |
|
|
|
420,000 |
|
|
|
482,000 |
|
Short-term investments |
|
|
7,000 |
|
|
|
20,000 |
|
|
|
12,000 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
121,072,000 |
|
|
|
144,181,000 |
|
|
|
137,260,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
59,812,000 |
|
|
|
76,221,000 |
|
|
|
64,755,000 |
|
Short-term borrowings |
|
|
2,021,000 |
|
|
|
3,493,000 |
|
|
|
2,867,000 |
|
Federal Home Loan Bank advances |
|
|
10,554,000 |
|
|
|
6,100,000 |
|
|
|
5,393,000 |
|
Long-term borrowings |
|
|
2,476,000 |
|
|
|
2,810,000 |
|
|
|
2,658,000 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
74,863,000 |
|
|
|
88,624,000 |
|
|
|
75,673,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
46,209,000 |
|
|
|
55,557,000 |
|
|
|
61,587,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
21,200,000 |
|
|
|
11,070,000 |
|
|
|
5,775,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses |
|
|
25,009,000 |
|
|
|
44,487,000 |
|
|
|
55,812,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on accounts |
|
|
1,994,000 |
|
|
|
1,610,000 |
|
|
|
1,386,000 |
|
Earnings on bank owned life insurance policies |
|
|
1,727,000 |
|
|
|
1,252,000 |
|
|
|
1,165,000 |
|
Credit and debit card fees |
|
|
745,000 |
|
|
|
668,000 |
|
|
|
557,000 |
|
Letter of credit fees |
|
|
687,000 |
|
|
|
613,000 |
|
|
|
443,000 |
|
Mortgage banking activities |
|
|
662,000 |
|
|
|
464,000 |
|
|
|
553,000 |
|
Net gain on sales of commercial loans |
|
|
0 |
|
|
|
0 |
|
|
|
29,000 |
|
Other income |
|
|
1,467,000 |
|
|
|
1,263,000 |
|
|
|
1,128,000 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
7,282,000 |
|
|
|
5,870,000 |
|
|
|
5,261,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
22,493,000 |
|
|
|
22,876,000 |
|
|
|
18,983,000 |
|
Occupancy |
|
|
3,826,000 |
|
|
|
3,300,000 |
|
|
|
3,136,000 |
|
Furniture and equipment rent, depreciation and maintenance |
|
|
1,980,000 |
|
|
|
2,063,000 |
|
|
|
2,050,000 |
|
Nonperforming asset costs |
|
|
3,266,000 |
|
|
|
1,099,000 |
|
|
|
430,000 |
|
Data processing |
|
|
2,394,000 |
|
|
|
2,017,000 |
|
|
|
1,657,000 |
|
FDIC insurance |
|
|
1,890,000 |
|
|
|
654,000 |
|
|
|
184,000 |
|
Advertising |
|
|
559,000 |
|
|
|
585,000 |
|
|
|
600,000 |
|
Other expense |
|
|
5,718,000 |
|
|
|
5,762,000 |
|
|
|
5,222,000 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
|
42,126,000 |
|
|
|
38,356,000 |
|
|
|
32,262,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income tax expense (benefit) |
|
|
(9,835,000 |
) |
|
|
12,001,000 |
|
|
|
28,811,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
(4,876,000 |
) |
|
|
3,035,000 |
|
|
|
8,964,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959,000 |
) |
|
$ |
8,966,000 |
|
|
$ |
19,847,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.59 |
) |
|
$ |
1.06 |
|
|
$ |
2.36 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.59 |
) |
|
$ |
1.06 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
Total |
|
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Stock |
|
|
Earnings (Deficit) |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2006 |
|
$ |
148,533,000 |
|
|
$ |
8,000,000 |
|
|
$ |
(1,408,000 |
) |
|
$ |
155,125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of 5% stock dividend |
|
|
12,014,000 |
|
|
|
(12,018,000 |
) |
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan, 2,912 shares |
|
|
107,000 |
|
|
|
|
|
|
|
|
|
|
|
107,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan, 2,657 shares |
|
|
98,000 |
|
|
|
|
|
|
|
|
|
|
|
98,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, 64,971 shares |
|
|
814,000 |
|
|
|
|
|
|
|
|
|
|
|
814,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock tendered for stock option
exercises, 15,685 shares |
|
|
(585,000 |
) |
|
|
|
|
|
|
|
|
|
|
(585,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.48 per share) |
|
|
|
|
|
|
(4,035,000 |
) |
|
|
|
|
|
|
(4,035,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
242,000 |
|
|
|
|
|
|
|
|
|
|
|
242,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
19,847,000 |
|
|
|
|
|
|
|
19,847,000 |
|
Change in net unrealized loss on
securities available for sale, net of
reclassifications and tax effect |
|
|
|
|
|
|
|
|
|
|
306,000 |
|
|
|
306,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,153,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006 |
|
|
161,223,000 |
|
|
|
11,794,000 |
|
|
|
(1,102,000 |
) |
|
|
171,915,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of 5% stock dividend |
|
|
11,131,000 |
|
|
|
(11,135,000 |
) |
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan, 3,966 shares |
|
|
91,000 |
|
|
|
|
|
|
|
|
|
|
|
91,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan, 3,137 shares |
|
|
76,000 |
|
|
|
|
|
|
|
|
|
|
|
76,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, 52,117 shares |
|
|
643,000 |
|
|
|
|
|
|
|
|
|
|
|
643,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock tendered for stock option
exercises, 18,291 shares |
|
|
(587,000 |
) |
|
|
|
|
|
|
|
|
|
|
(587,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.55 per share) |
|
|
|
|
|
|
(4,677,000 |
) |
|
|
|
|
|
|
(4,677,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
361,000 |
|
|
|
|
|
|
|
|
|
|
|
361,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
8,966,000 |
|
|
|
|
|
|
|
8,966,000 |
|
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassifications and tax effect |
|
|
|
|
|
|
|
|
|
|
1,371,000 |
|
|
|
1,371,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,337,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007 |
|
|
172,938,000 |
|
|
|
4,948,000 |
|
|
|
269,000 |
|
|
|
178,155,000 |
|
See accompanying notes to consolidated financial statements.
F-35
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Continued)
Years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
Total |
|
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Stock |
|
|
Earnings (Deficit) |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007 |
|
$ |
172,938,000 |
|
|
$ |
4,948,000 |
|
|
$ |
269,000 |
|
|
$ |
178,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan, 10,904 shares |
|
|
76,000 |
|
|
|
|
|
|
|
|
|
|
|
76,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan, 4,340 shares |
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, 2,000 shares |
|
|
16,000 |
|
|
|
|
|
|
|
|
|
|
|
16,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock tendered for stock option exercises,
1,123 shares |
|
|
(16,000 |
) |
|
|
|
|
|
|
|
|
|
|
(16,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
654,000 |
|
|
|
|
|
|
|
|
|
|
|
654,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.31 per share) |
|
|
(1,355,000 |
) |
|
|
(1,270,000 |
) |
|
|
|
|
|
|
(2,625,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(4,959,000 |
) |
|
|
|
|
|
|
(4,959,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain
on securities available for sale,
net of reclassifications and tax effect |
|
|
|
|
|
|
|
|
|
|
1,795,000 |
|
|
|
1,795,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net fair value of interest
rate swaps, net of reclassifications
and tax effect |
|
|
|
|
|
|
|
|
|
|
1,236,000 |
|
|
|
1,236,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,928,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008 |
|
$ |
172,353,000 |
|
|
$ |
(1,281,000 |
) |
|
$ |
3,300,000 |
|
|
$ |
174,372,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-36
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959,000 |
) |
|
$ |
8,966,000 |
|
|
$ |
19,847,000 |
|
Adjustments to reconcile net income (loss)
to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,762,000 |
|
|
|
3,080,000 |
|
|
|
2,887,000 |
|
Provision for loan and lease losses |
|
|
21,200,000 |
|
|
|
11,070,000 |
|
|
|
5,775,000 |
|
Deferred income tax benefit |
|
|
(1,558,000 |
) |
|
|
(2,103,000 |
) |
|
|
(474,000 |
) |
Stock-based compensation expense |
|
|
654,000 |
|
|
|
361,000 |
|
|
|
242,000 |
|
Net gain on sales of commercial loans |
|
|
0 |
|
|
|
0 |
|
|
|
(29,000 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
44,095,000 |
|
|
|
32,911,000 |
|
|
|
18,133,000 |
|
Origination of mortgage loans held for sale |
|
|
(42,810,000 |
) |
|
|
(33,408,000 |
) |
|
|
(18,766,000 |
) |
Net gain on sales of mortgage loans |
|
|
(506,000 |
) |
|
|
(432,000 |
) |
|
|
(231,000 |
) |
Loss on sale of foreclosed assets |
|
|
1,768,000 |
|
|
|
157,000 |
|
|
|
8,000 |
|
Earnings on bank owned life insurance |
|
|
(1,727,000 |
) |
|
|
(1,252,000 |
) |
|
|
(1,165,000 |
) |
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
1,444,000 |
|
|
|
330,000 |
|
|
|
(2,013,000 |
) |
Other assets |
|
|
(61,000 |
) |
|
|
(2,243,000 |
) |
|
|
(1,658,000 |
) |
Accrued interest and other liabilities |
|
|
(6,667,000 |
) |
|
|
1,927,000 |
|
|
|
5,277,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
13,635,000 |
|
|
|
19,364,000 |
|
|
|
27,833,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
(96,292,000 |
) |
|
|
(15,406,000 |
) |
|
|
(24,886,000 |
) |
Securities held to maturity |
|
|
(978,000 |
) |
|
|
(4,658,000 |
) |
|
|
(4,567,000 |
) |
Federal Home Loan Bank stock |
|
|
(5,948,000 |
) |
|
|
(2,224,000 |
) |
|
|
0 |
|
Proceeds from: |
|
|
|
|
|
|
|
|
|
|
|
|
Maturities, calls and repayments of
securities available for sale |
|
|
73,571,000 |
|
|
|
11,969,000 |
|
|
|
7,423,000 |
|
Maturities, calls and repayments of
securities held to maturity |
|
|
1,840,000 |
|
|
|
3,221,000 |
|
|
|
1,330,000 |
|
Redemption of Federal Home Loan Bank stock |
|
|
0 |
|
|
|
0 |
|
|
|
378,000 |
|
Loan and lease originations and payments, net |
|
|
(86,489,000 |
) |
|
|
(66,681,000 |
) |
|
|
(189,793,000 |
) |
Purchases of premises and equipment, net |
|
|
(673,000 |
) |
|
|
(3,513,000 |
) |
|
|
(5,911,000 |
) |
Proceeds from sale of foreclosed assets |
|
|
4,777,000 |
|
|
|
1,476,000 |
|
|
|
1,055,000 |
|
Purchases of bank owned life insurance policies |
|
|
(1,617,000 |
) |
|
|
(7,008,000 |
) |
|
|
(1,621,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash for investing activities |
|
|
(111,809,000 |
) |
|
|
(82,824,000 |
) |
|
|
(216,592,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in time deposits |
|
|
42,774,000 |
|
|
|
(50,972,000 |
) |
|
|
229,843,000 |
|
Net increase (decrease) in all other deposits |
|
|
(34,380,000 |
) |
|
|
(4,750,000 |
) |
|
|
(2,292,000 |
) |
Net increase (decrease) in securities sold under
agreements to repurchase |
|
|
(3,052,000 |
) |
|
|
11,993,000 |
|
|
|
13,271,000 |
|
Net increase (decrease) in federal funds purchased |
|
|
(13,800,000 |
) |
|
|
4,000,000 |
|
|
|
200,000 |
|
Proceeds from Federal Home Loan Bank advances |
|
|
266,500,000 |
|
|
|
175,000,000 |
|
|
|
80,000,000 |
|
Pay-off of Federal Home Loan Bank advances |
|
|
(176,500,000 |
) |
|
|
(90,000,000 |
) |
|
|
(115,000,000 |
) |
Increase in structured repurchase agreements |
|
|
15,000,000 |
|
|
|
0 |
|
|
|
0 |
|
Increase in other borrowed money |
|
|
515,000 |
|
|
|
697,000 |
|
|
|
969,000 |
|
Cash paid in lieu of fractional shares on stock dividend |
|
|
0 |
|
|
|
(4,000 |
) |
|
|
(4,000 |
) |
Employee stock purchase plan |
|
|
76,000 |
|
|
|
91,000 |
|
|
|
107,000 |
|
Dividend reinvestment plan |
|
|
40,000 |
|
|
|
76,000 |
|
|
|
98,000 |
|
Stock option exercises, net |
|
|
0 |
|
|
|
56,000 |
|
|
|
229,000 |
|
Cash dividends |
|
|
(2,625,000 |
) |
|
|
(4,677,000 |
) |
|
|
(4,035,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
94,548,000 |
|
|
|
41,510,000 |
|
|
|
203,386,000 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-37
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(3,626,000 |
) |
|
|
(21,950,000 |
) |
|
|
14,627,000 |
|
Cash and cash equivalents at beginning of period |
|
|
29,430,000 |
|
|
|
51,380,000 |
|
|
|
36,753,000 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
25,804,000 |
|
|
$ |
29,430,000 |
|
|
$ |
51,380,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
80,748,000 |
|
|
$ |
87,707,000 |
|
|
$ |
67,925,000 |
|
Federal income taxes |
|
|
0 |
|
|
|
5,730,000 |
|
|
|
10,875,000 |
|
Transfers from loans and leases to foreclosed assets |
|
|
9,062,000 |
|
|
|
6,898,000 |
|
|
|
2,129,000 |
|
See accompanying notes to consolidated financial statements.
F-38
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of
Mercantile Bank Corporation (Mercantile) and its subsidiary, Mercantile Bank of Michigan
(Bank), and of Mercantile Bank Mortgage Company, LLC (Mortgage Company), Mercantile Bank Real
Estate Co., L.L.C. (Mercantile Real Estate) and Mercantile Insurance Center, Inc. (Mercantile
Insurance), subsidiaries of our bank, after elimination of significant intercompany transactions
and accounts.
We formed a business trust, Mercantile Bank Capital Trust I (the trust), in 2004 to issue trust
preferred securities. We issued subordinated debentures to the trust in return for the proceeds
raised from the issuance of the trust preferred securities. In accordance with FASB Interpretation
No. 46(R), Consolidation of Variable Interest Entities, the trust is not consolidated, but instead
we report the subordinated debentures issued to the trust as a liability.
Nature of Operations: Mercantile was incorporated on July 15, 1997 to establish and own
the Bank based in Grand Rapids, Michigan. The Bank is a community-based financial institution.
The Bank began operations on December 15, 1997. The Banks primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are commercial loans,
commercial leases, residential mortgage loans, and instalment loans. Substantially all loans and
leases are secured by specific items of collateral including business assets, real estate or
consumer assets. Commercial loans and leases are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by commercial or residential real estate.
The Banks loan accounts are primarily with customers located in the Grand Rapids, Holland,
Lansing, Ann Arbor and Oakland County areas. The Banks retail deposits are also from customers
located within those areas. As an alternative source of funds, the Bank has also issued
certificates to depositors outside of the Banks primary market areas. Substantially all revenues
are derived from banking products and services and investment securities.
Mercantile Bank Mortgage Company was formed during 2000. A subsidiary of the Bank, Mercantile Bank
Mortgage Company was established to increase the profitability and efficiency of the mortgage loan
operations. Mercantile Bank Mortgage Company initiated business on October 24, 2000 via the Banks
contribution of most of its residential mortgage loan portfolio and participation interests in
certain commercial mortgage loans. On the same date, the Bank also transferred its residential
mortgage origination function to Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile
Bank Mortgage Company was reorganized as Mercantile Bank Mortgage Company, LLC, a limited liability
company, which is 99% owned by the Bank and 1% owned by Mercantile Insurance. Mortgage loans
originated and held by Mercantile Bank Mortgage Company are serviced by the Bank pursuant to a
servicing agreement.
Mercantile Insurance was formed during 2002 through the acquisition of an existing shelf insurance
agency. Insurance products are offered through an Agency and Institutions Agreement among
Mercantile Insurance, the Bank and Hub International. The insurance products are marketed through
a central facility operated by the Michigan Bankers Insurance Association, members of which include
the insurance subsidiaries of various Michigan-based financial institutions and Hub International.
Mercantile Insurance receives commissions based upon written premiums produced under the Agency and
Institutions Agreement.
Mercantile Real Estate was organized on July 21, 2003, principally to develop, construct, and own a
facility in downtown Grand Rapids that serves as our banks main office and Mercantiles
headquarters. This facility was placed into service during the second quarter of 2005.
Mercantile filed an election to become a financial holding company pursuant to Title I of the
Gramm-Leach-Bliley Act and Federal Reserve Board regulations effective March 23, 2000.
(Continued)
F-39
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates: To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates and assumptions
based on available information.
These estimates and assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. The allowance for loan and lease losses and
the fair values of financial instruments are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand deposits with
other financial institutions, short-term investments (including securities with daily put
provisions) and federal funds sold. Cash flows are reported net for customer loan and deposit
transactions, interest-bearing time deposits with other financial institutions and short-term
borrowings with maturities of 90 days or less.
Securities: Debt securities classified as held to maturity are carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Debt securities are
classified as available for sale when they might be sold prior to maturity. Equity securities with
readily determinable fair values are classified as available for sale. Securities available for
sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums
and discounts on securities are amortized or accreted on the level-yield method without
anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.
Gains and losses on sales are recorded on the trade date and determined using the specific
identification method.
Declines in the fair value of securities below their amortized cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary losses, management considers:
(1) the length of time and extent that fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, and (3) our ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair value.
Loans and Leases: Loans and leases that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at the principal balance
outstanding, net of deferred loan fees and costs and an allowance for loan and lease losses.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized in interest income using the level-yield
method without anticipating prepayments. Net unamortized deferred loan fees amounted to $0.8
million and $0.3 million at December 31, 2008 and 2007, respectively.
Interest income on commercial loans and leases and mortgage loans is discontinued at the time the
loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer
and credit card loans are typically charged off no later than when they are 120 days past due.
Past due status is based on the contractual terms of the loan or lease. In all cases, loans and
leases are placed on nonaccrual or charged off at an earlier date if collection of principal and
interest is considered doubtful.
All interest accrued but not received for loans and leases placed on nonaccrual is reversed against
interest income. Interest received on such loans and leases is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans and leases are returned to
accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
(Continued)
F-40
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or market, as determined by outstanding
commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance
and charged to earnings. Such loans are sold service released. The balance of loans held for sale
equaled $1.1 million and $1.9 million as of December 31, 2008 and 2007,
respectively. Mortgage banking activities include fees on direct brokered mortgage loans and the
net gain on sale of mortgage loans originated for sale.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a
valuation allowance for probable incurred credit losses. Loan and lease losses are charged against
the allowance when management believes the uncollectibility of a loan or lease balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan and lease loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic
conditions and other factors. Allocations of the allowance may be made for specific loans and
leases, but the entire allowance is available for any loan or lease that, in managements judgment,
should be charged-off.
A loan or lease is considered impaired when, based on current information and events, it is
probable we will be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan or lease and the borrower, including
the length of delay, the reasons for the delay, the borrowers prior payment record and the amount
of the shortfall in relation to the principal and interest owed. Impairment is measured on a
loan-by-loan basis for commercial loans and leases and construction loans by either the present
value of expected future cash flows discounted at the loans effective interest rate, the loans
obtainable market price or the fair value of collateral if the loan is collateral dependent. Large
groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not
separately identify individual residential and consumer loans for impairment disclosures.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales
when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when: (1) the assets have been isolated from the corporation, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control
over the transferred assets through an agreement to repurchase them before their maturity. Our
transfers of financial assets are limited to commercial loan participations sold, which were
insignificant for 2008, 2007 and 2006, and the sale of residential mortgage loans in the secondary
market, the extent of which is disclosed in the consolidated statements of cash flows.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at
cost less accumulated depreciation. Buildings and related components are depreciated using the
straight-line method with useful lives ranging from 5 to 33 years. Furniture, fixtures and
equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7
years. Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized.
Long-lived Assets: Premises and equipment and other long-lived assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at the lower of carrying value or
fair value.
(Continued)
F-41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets: Assets acquired through or in lieu of foreclosure are initially
recorded at the estimated fair value net of estimated selling costs when acquired, establishing a
new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed. Foreclosed assets are included in other assets in the accompanying
consolidated balance sheets and totaled $8.1 million and $5.9 million at December 31, 2008 and
2007, respectively.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key
officers. Bank owned life insurance is recorded at its cash surrender value, or the amount that
can be realized.
Repurchase Agreements: Substantially all repurchase agreement liabilities represent
amounts advanced by various customers. Securities are pledged to cover these liabilities, which
are not covered by federal deposit insurance.
Financial Instruments and Loan Commitments: Financial instruments include
off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded. Instruments, such as standby letters of credit that
are considered financial guarantees in accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 45, are recorded at fair value.
Stock-Based Compensation: Pursuant to Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, compensation cost for equity-based awards is measured on the grant
date based on the fair value of the award at that date, and is recognized over the requisite
service period, net of estimated forfeitures. Fair value of stock option awards is estimated using
a closed option valuation (Black-Scholes) model. Fair value of restricted stock awards is based
upon the quoted market price of the common stock on the date of grant.
Income Taxes: Income tax expense is the total of the current year income tax due or
refundable, the change in deferred income tax assets and liabilities, and any adjustments related
to unrecognized tax benefits. Deferred income tax assets and liabilities are recognized for the
tax consequences of temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates applicable to future years. A valuation allowance,
if needed, reduces deferred income tax assets to the amount expected to be realized.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated
using relevant market information and other assumptions. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates. The fair
value estimates of existing on- and off-balance sheet financial instruments do not include the
value of anticipated future business or the values of assets and liabilities not considered
financial instruments.
Earnings Per Share: Basic earnings per share is based on weighted average common shares
outstanding during the period exclusive of unvested restricted shares outstanding. Diluted
earnings per share include the dilutive effect of additional potential common shares issuable under
stock options and restricted stock awards and are determined using the treasury stock method.
Stock Dividend: Earnings per share are restated for all stock dividends, including the 5%
stock dividends paid on May 4, 2007 and May 16, 2006. The fair value of shares issued in stock
dividends is transferred from retained earnings to common stock to the extent of available retained
earnings.
(Continued)
F-42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on securities available
for sale which are also recognized as separate components of equity. For 2008, other comprehensive
income also includes the change in fair value of interest rate swaps as discussed in more detail in
Note 13.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at
fair value. The accounting for changes in the fair value of derivatives depends on the use of the
derivatives and whether the derivatives qualify for hedge accounting. During 2008, our derivatives
consisted of interest rate swap agreements, which were used as part of our asset liability
management to help manage interest rate risk. We do not use derivatives for trading purposes.
Changes in the fair value of derivatives that are designated as a hedge of the variability of cash
flows to be received on the hedged asset or liability and are effective are reported in other
comprehensive income. They are later
reclassified into earnings in the same periods during which the hedged transaction affects earnings
and are included in the line item in which the hedged cash flows are recorded. If hedge accounting
does not apply, changes in the fair value of derivatives are recognized immediately in current
earnings as noninterest income or expense.
If designated as a hedge, we formally document the relationship between derivatives as hedged
items, as well as the risk-management objective and the strategy for undertaking hedge
transactions. This documentation includes linking cash flow hedges to specific assets on the
balance sheet. If designated as a hedge, we also formally assess, both at the inception and on an
ongoing basis, whether the derivative instruments that are used are highly effective in offsetting
changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized
immediately in current earnings as noninterest income or expense. We discontinue hedge accounting
when we determine the derivative is no longer effective in offsetting changes in the cash flows of
the hedged item, the derivative is settled or terminates, or treatment of the derivatives as a
hedge is no longer appropriate or intended.
Contingencies: Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. We do not believe there are any such
matters that would have a material effect on the financial statements.
Reclassifications: Some items in the prior year financial statements were reclassified to
conform to the current presentation.
Operating Segment: While we monitor the revenue streams of the various products and
services offered, the Company manages its business on the basis of one operating segment, banking,
in accordance with the qualitative and quantitative criteria established by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Adoption of New Accounting Standards: In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, to further enhance the accounting and financial reporting related to
business combinations. SFAS No. 141(R) establishes principles and requirements for how the
acquirer in a business combination (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain
from a bargain purchase, and (3) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination.
SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December 15,
2008. Therefore, the effects of the adoption of SFAS No. 141(R) will depend upon the extent and
magnitude of acquisitions after December 31, 2008.
(Continued)
F-43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2008 and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair
value measurements, the FASB having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. SFAS No. 157 does not require any new fair value
measurements and was originally effective beginning January 1, 2008. In February 2008, the FASB
issued FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 allows entities to electively defer
the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial
liabilities except those items recognized or disclosed at fair value on an annual or more
frequently recurring basis. We will apply the fair value measurement and disclosure provisions of
SFAS No. 157 to nonfinancial assets and nonfinancial liabilities effective January 1, 2009. The
application of such is not expected to be material to our results of operations or financial
position. On October 10, 2008, the FASB issued FSP FAS 157-3 to clarify the application of fair
value measurements of a financial asset when the market for that asset is not active. This
clarifying guidance became effective upon issuance. This new guidance had no effect on our
consolidated results of operations or financial position. See Note 15 for a discussion regarding
the January 1, 2008 implementation of SFAS No. 157 relating to our financial assets and
liabilities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair
value at specified election dates. For items for which the fair value option has been elected,
unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The
fair value option is irrevocable unless a new election date occurs, may be applied instrument by
instrument, with a few exceptions, and applies only to entire instruments and not to portions of
instruments. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex
hedge accounting. SFAS No. 159 was effective beginning January 1, 2008. Through December 31,
2008, we have not elected the fair value option for any of our financial assets or liabilities.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging
Activities an Amendment of FASB Statement No. 133. SFAS No. 161 expands disclosure requirements
regarding an entitys derivative instruments and hedging activities. Expanded qualitative
disclosures that will be required under SFAS No. 161 include: (1) how and why an entity uses
derivative instruments; (2) how derivative instruments and related hedged items are accounted for
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and related
interpretations; and (3) how derivative instruments and related hedged items affect an entitys
financial statements. SFAS No. 161 is effective beginning January 1, 2009. We do not expect SFAS
No. 161 to have a material effect on our derivative disclosures upon adoption.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with U.S.
generally accepted accounting principles (GAAP). SFAS No. 162 directs the GAAP hierarchy to the
entity, not the independent auditors, as the entity is responsible for selecting accounting
principles for financial statements that are presented in conformity with GAAP. SFAS No. 162
became effective 60 days following the Securities and Exchange Commissions September 2008 approval
of the Public Accounting Oversight Board amendments to remove the GAAP hierarchy from the audit
standards. The adoption of SFAS No. 162 did not have an impact on our consolidated results of
operations or financial position.
(Continued)
F-44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 2 SECURITIES
The amortized cost, fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
61,511,000 |
|
|
$ |
1,264,000 |
|
|
$ |
(393,000 |
) |
|
$ |
62,382,000 |
|
Mortgage-backed securities |
|
|
74,702,000 |
|
|
|
2,324,000 |
|
|
|
0 |
|
|
|
77,026,000 |
|
Michigan Strategic Fund bonds |
|
|
22,105,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
22,105,000 |
|
Mutual fund |
|
|
1,175,000 |
|
|
|
0 |
|
|
|
(19,000 |
) |
|
|
1,156,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
159,493,000 |
|
|
$ |
3,588,000 |
|
|
$ |
(412,000 |
) |
|
$ |
162,669,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
80,129,000 |
|
|
$ |
860,000 |
|
|
$ |
(44,000 |
) |
|
$ |
80,945,000 |
|
Mortgage-backed securities |
|
|
55,003,000 |
|
|
|
193,000 |
|
|
|
(577,000 |
) |
|
|
54,619,000 |
|
Mutual fund |
|
|
1,127,000 |
|
|
|
0 |
|
|
|
(18,000 |
) |
|
|
1,109,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
136,259,000 |
|
|
$ |
1,053,000 |
|
|
$ |
(639,000 |
) |
|
$ |
136,673,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Amount |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal general obligation bonds |
|
$ |
56,893,000 |
|
|
$ |
1,133,000 |
|
|
$ |
(351,000 |
) |
|
$ |
57,675,000 |
|
Municipal revenue bonds |
|
|
7,544,000 |
|
|
|
175,000 |
|
|
|
(13,000 |
) |
|
|
7,706,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,437,000 |
|
|
$ |
1,308,000 |
|
|
$ |
(364,000 |
) |
|
$ |
65,381,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal general obligation bonds |
|
$ |
57,668,000 |
|
|
$ |
1,084,000 |
|
|
$ |
(164,000 |
) |
|
$ |
58,588,000 |
|
Municipal revenue bonds |
|
|
7,662,000 |
|
|
|
198,000 |
|
|
|
(8,000 |
) |
|
|
7,852,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,330,000 |
|
|
$ |
1,282,000 |
|
|
$ |
(172,000 |
) |
|
$ |
66,440,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 2 SECURITIES (Continued)
Securities with unrealized losses at year-end 2008 and 2007, aggregated by investment category and
length of time that individual securities have been in a continuous loss position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
20,588,000 |
|
|
$ |
(387,000 |
) |
|
$ |
1,994,000 |
|
|
$ |
(6,000 |
) |
|
$ |
22,582,000 |
|
|
$ |
(393,000 |
) |
Mortgage-backed securities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Michigan Strategic Fund bonds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Mutual fund |
|
|
0 |
|
|
|
0 |
|
|
|
1,156,000 |
|
|
|
(19,000 |
) |
|
|
1,156,000 |
|
|
|
(19,000 |
) |
Municipal general
obligation bonds |
|
|
3,547,000 |
|
|
|
(76,000 |
) |
|
|
10,852,000 |
|
|
|
(275,000 |
) |
|
|
14,399,000 |
|
|
|
(351,000 |
) |
Municipal revenue bonds |
|
|
307,000 |
|
|
|
(1,000 |
) |
|
|
794,000 |
|
|
|
(12,000 |
) |
|
|
1,101,000 |
|
|
|
(13,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,442,000 |
|
|
$ |
(464,000 |
) |
|
$ |
14,796,000 |
|
|
$ |
(312,000 |
) |
|
$ |
39,238,000 |
|
|
$ |
(776,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
7,953,000 |
|
|
$ |
(44,000 |
) |
|
$ |
7,953,000 |
|
|
$ |
(44,000 |
) |
Mortgage-backed securities |
|
|
1,241,000 |
|
|
|
(3,000 |
) |
|
|
35,277,000 |
|
|
|
(574,000 |
) |
|
|
36,518,000 |
|
|
|
(577,000 |
) |
Mutual fund |
|
|
0 |
|
|
|
0 |
|
|
|
1,109,000 |
|
|
|
(18,000 |
) |
|
|
1,109,000 |
|
|
|
(18,000 |
) |
Municipal general
obligation bonds |
|
|
2,899,000 |
|
|
|
(29,000 |
) |
|
|
11,001,000 |
|
|
|
(135,000 |
) |
|
|
13,900,000 |
|
|
|
(164,000 |
) |
Municipal revenue bonds |
|
|
255,000 |
|
|
|
(1,000 |
) |
|
|
1,029,000 |
|
|
|
(7,000 |
) |
|
|
1,284,000 |
|
|
|
(8,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,395,000 |
|
|
$ |
(33,000 |
) |
|
$ |
56,369,000 |
|
|
$ |
(778,000 |
) |
|
$ |
60,764,000 |
|
|
$ |
(811,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate securities for other-than-temporary impairment at least on a quarterly basis.
Consideration is given to the length of time and the extent to which the fair value has been less
than cost, the financial condition and near-term prospects of the issuer, and the intent and
ability we have to retain our investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuers financial condition, we may
consider whether the securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred and the results of reviews of the issuers
financial condition.
There were one U.S. Government agency debt obligation, 36 municipal general obligation bonds and
three municipal revenue bonds in a continuous loss position for 12 months or more at December 31,
2008. At December 31, 2008, 67 debt securities and a mutual fund with a fair value totaling $39.2
million have unrealized losses with aggregate depreciation of $0.8 million, or 0.3% from the
amortized cost basis of total securities. At December 31, 2008, 289 debt securities with a fair
value totaling $161.3 million have unrealized gains with aggregate appreciation of $4.9 million, or
2.2% from the amortized cost basis of total securities. After we considered whether the securities
were issued by the federal government or its agencies and whether downgrades by bond rating
agencies had occurred, we determined that unrealized losses were due to changing interest rate
environments. As we have the intent and ability to hold debt securities until maturity, or for the
foreseeable future if classified as available for sale, no declines are deemed to be
other-than-temporary.
(Continued)
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 2 SECURITIES (Continued)
The amortized cost and fair values of debt securities at year-end 2008, by contractual maturity,
are shown below. The contractual maturity is utilized below for U.S. Government agency debt
obligations and municipal bonds. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties. Securities not due at a single maturity date,
primarily mortgage backed securities, are shown separately.
The maturities of securities and their weighted average yields at December 31, 2008 are also shown
in the following table. The yields for municipal securities are shown at their tax equivalent
yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity |
|
|
Available-for-Sale |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
Carrying |
|
|
Fair |
|
|
Average |
|
|
Amortized |
|
|
Fair |
|
|
|
Yield |
|
|
Amount |
|
|
Value |
|
|
Yield |
|
|
Cost |
|
|
Value |
|
|
Due in one year or less |
|
|
6.64 |
% |
|
$ |
1,884,000 |
|
|
$ |
1,914,000 |
|
|
NA |
|
$ |
0 |
|
|
$ |
0 |
|
Due from one to five years |
|
|
6.73 |
|
|
|
10,457,000 |
|
|
|
10,891,000 |
|
|
|
4.70 |
% |
|
|
11,934,000 |
|
|
|
12,235,000 |
|
Due from five to ten years |
|
|
6.57 |
|
|
|
13,496,000 |
|
|
|
13,948,000 |
|
|
|
5.29 |
|
|
|
16,637,000 |
|
|
|
17,065,000 |
|
Due after ten years |
|
|
6.35 |
|
|
|
38,600,000 |
|
|
|
38,628,000 |
|
|
|
5.33 |
|
|
|
32,940,000 |
|
|
|
33,082,000 |
|
Mortgage-backed securities |
|
NA |
|
|
0 |
|
|
|
0 |
|
|
|
5.16 |
|
|
|
74,702,000 |
|
|
|
77,026,000 |
|
Michigan Strategic Fund bonds |
|
NA |
|
|
0 |
|
|
|
0 |
|
|
|
2.99 |
|
|
|
22,105,000 |
|
|
|
22,105,000 |
|
Mutual fund |
|
NA |
|
|
0 |
|
|
|
0 |
|
|
|
4.00 |
|
|
|
1,175,000 |
|
|
|
1,156,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.47 |
% |
|
$ |
64,437,000 |
|
|
$ |
65,381,000 |
|
|
|
4.87 |
% |
|
$ |
159,493,000 |
|
|
$ |
162,669,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, 2007 and 2006, there were no securities sold.
At year-end 2008 and 2007, the amortized cost of securities issued by the state of Michigan and all
its political subdivisions totaled $64.4 million and $65.3 million, with an estimated market value
of $65.4 million and $66.4 million, respectively. Total securities of any other specific issuer,
other than the U.S. Government and its agencies, did not exceed 10% of shareholders equity.
The carrying value of securities that are pledged to secure repurchase agreements and other
deposits was $124.2 million and $109.2 million at December 31, 2008 and 2007, respectively. In
addition, substantially all of our municipal bonds have been pledged to the Discount Window of the
Federal Reserve Bank of Chicago. Investments in Federal Home Loan Bank stock are restricted and
may only be resold, or redeemed by, the issuer.
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Year-end loans and leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
Increase |
|
|
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
|
(Decrease) |
|
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
development |
|
$ |
263,392,000 |
|
|
|
14.1 |
% |
|
$ |
263,868,000 |
|
|
|
14.7 |
% |
|
|
(0.2 |
)% |
Secured by 1 4
family properties |
|
|
140,776,000 |
|
|
|
7.6 |
|
|
|
135,517,000 |
|
|
|
7.5 |
|
|
|
3.9 |
|
Secured by multi-family properties |
|
|
47,365,000 |
|
|
|
2.6 |
|
|
|
51,951,000 |
|
|
|
2.9 |
|
|
|
(8.8 |
) |
Secured by
nonresidential properties |
|
|
881,350,000 |
|
|
|
47.5 |
|
|
|
855,872,000 |
|
|
|
47.6 |
|
|
|
3.0 |
|
Commercial |
|
|
516,201,000 |
|
|
|
27.8 |
|
|
|
484,645,000 |
|
|
|
26.9 |
|
|
|
6.5 |
|
Leases |
|
|
1,985,000 |
|
|
|
0.1 |
|
|
|
2,865,000 |
|
|
|
0.1 |
|
|
|
(30.7 |
) |
Consumer |
|
|
5,846,000 |
|
|
|
0.3 |
|
|
|
5,162,000 |
|
|
|
0.3 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,856,915,000 |
|
|
|
100.0 |
% |
|
$ |
1,799,880,000 |
|
|
|
100.0 |
% |
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for loan and lease losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Beginning balance |
|
$ |
25,814,000 |
|
|
$ |
21,411,000 |
|
|
$ |
20,527,000 |
|
Provision for loan and lease losses |
|
|
21,200,000 |
|
|
|
11,070,000 |
|
|
|
5,775,000 |
|
Charge-offs |
|
|
(20,594,000 |
) |
|
|
(7,274,000 |
) |
|
|
(5,389,000 |
) |
Recoveries |
|
|
688,000 |
|
|
|
607,000 |
|
|
|
498,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
27,108,000 |
|
|
$ |
25,814,000 |
|
|
$ |
21,411,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Impaired loans and leases were as follows: |
|
|
|
|
|
|
|
|
|
Year-end loans with no allocated allowance for loan and lease losses |
|
$ |
22,557,000 |
|
|
$ |
10,842,000 |
|
Year-end loans with allocated allowance for loan and lease losses |
|
|
22,222,000 |
|
|
|
14,052,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,779,000 |
|
|
$ |
24,894,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the allowance for loan and lease losses allocated |
|
$ |
3,980,000 |
|
|
$ |
3,237,000 |
|
Impaired loans and leases for which no allocation to the allowance for loan and leases losses has
been made generally reflect situations whereby the loans and leases have been charged-down to
estimated collateral value. The Bank recognized no interest income on impaired loans during 2008,
2007 or 2006. Average impaired loans were $35.9 million, $14.0 million and $6.1 million during
2008, 2007 and 2006, respectively. Lost interest income on nonaccrual loans totaled $2.1 million,
$0.9 million and $0.3 million in 2008, 2007 and 2006, respectively. Nonperforming loans includes
both smaller balance homogenous loans that are collectively evaluated for impairment and the above
individually classified impaired loans.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Nonperforming loans and leases were as follows: |
|
|
|
|
|
|
|
|
|
Loans and leases past due 90 days or more still accruing interest |
|
$ |
1,358,000 |
|
|
$ |
977,000 |
|
Nonaccrual loans and leases |
|
|
47,945,000 |
|
|
|
28,832,000 |
|
|
|
|
|
|
|
|
|
|
|
$ |
49,303,000 |
|
|
$ |
29,809,000 |
|
|
|
|
|
|
|
|
Concentrations within the loan portfolio were as follows at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage of |
|
|
Balance |
|
Loan Portfolio |
|
Balance |
|
Loan Portfolio |
Commercial real estate loans to
lessors of non-residential
buildings |
|
$ |
489,580,000 |
|
|
|
26.4 |
% |
|
$ |
483,210,000 |
|
|
|
26.8 |
% |
NOTE 4 PREMISES AND EQUIPMENT, NET
Year-end premises and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Land and improvements |
|
$ |
8,538,000 |
|
|
$ |
8,534,000 |
|
Buildings and leasehold improvements |
|
|
24,888,000 |
|
|
|
24,559,000 |
|
Furniture and equipment |
|
|
12,484,000 |
|
|
|
12,164,000 |
|
|
|
|
|
|
|
|
|
|
|
45,910,000 |
|
|
|
45,257,000 |
|
Less: accumulated depreciation |
|
|
13,576,000 |
|
|
|
10,906,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,334,000 |
|
|
$ |
34,351,000 |
|
|
|
|
|
|
|
|
Depreciation expense in 2008, 2007 and 2006 totaled $2.7 million, $2.7 million and $2.6 million,
respectively.
We entered into a lease arrangement for our banking facility in Ann Arbor, Michigan during 2005,
and for our banking facility in Oakland County during 2007. Rent expense for these facilities
totaled $319,000 and $169,000 during 2008 and 2007, respectively. Minimum rent commitments under
the operating leases were as follows, before considering renewal options that generally are
present:
|
|
|
|
|
2009 |
|
$ |
329,000 |
|
2010 |
|
|
254,000 |
|
2011 |
|
|
178,000 |
|
2012 |
|
|
168,000 |
|
2013 |
|
|
0 |
|
|
|
|
|
Total |
|
$ |
929,000 |
|
|
|
|
|
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 5 DEPOSITS
Deposits at year-end are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
December 31, 2008 |
|
December 31, 2007 |
|
Increase |
|
|
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
|
(Decrease) |
Noninterest-bearing
demand |
|
$ |
110,712,000 |
|
|
|
6.9 |
% |
|
$ |
133,056,000 |
|
|
|
8.4 |
% |
|
|
(16.8 |
)% |
Interest-bearing
checking |
|
|
50,248,000 |
|
|
|
3.1 |
|
|
|
44,491,000 |
|
|
|
2.8 |
|
|
|
12.9 |
|
Money market |
|
|
24,886,000 |
|
|
|
1.6 |
|
|
|
11,872,000 |
|
|
|
0.7 |
|
|
|
109.6 |
|
Savings |
|
|
49,943,000 |
|
|
|
3.1 |
|
|
|
80,750,000 |
|
|
|
5.1 |
|
|
|
(38.2 |
) |
Time, under $100,000 |
|
|
49,991,000 |
|
|
|
3.1 |
|
|
|
52,675,000 |
|
|
|
3.3 |
|
|
|
(5.1 |
) |
Time, $100,000 and
over |
|
|
184,573,000 |
|
|
|
11.6 |
|
|
|
343,296,000 |
|
|
|
21.6 |
|
|
|
(46.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470,353,000 |
|
|
|
29.4 |
|
|
|
666,140,000 |
|
|
|
41.9 |
|
|
|
(29.4 |
) |
Out-of-area time,
under $100,000 |
|
|
128,948,000 |
|
|
|
8.1 |
|
|
|
100,703,000 |
|
|
|
6.3 |
|
|
|
28.0 |
|
Out-of-area time,
$100,000 and over |
|
|
1,000,274,000 |
|
|
|
62.5 |
|
|
|
824,338,000 |
|
|
|
51.8 |
|
|
|
21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,129,222,000 |
|
|
|
70.6 |
|
|
|
925,041,000 |
|
|
|
58.1 |
|
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,599,575,000 |
|
|
|
100.0 |
% |
|
$ |
1,591,181,000 |
|
|
|
100.0 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the
primary market areas. As of December 31, 2008, out-of-area certificates of deposit totaling
$1,101.2 million were obtained through deposit brokers, with the remaining $28.0 million obtained
directly from the depositors.
The following table depicts the maturity distribution for certificates of deposit at year-end:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
In one year or less |
|
$ |
1,179,405,000 |
|
|
$ |
1,030,178,000 |
|
In one to two years |
|
|
140,299,000 |
|
|
|
227,492,000 |
|
In two to three years |
|
|
27,116,000 |
|
|
|
32,231,000 |
|
In three to four years |
|
|
10,232,000 |
|
|
|
21,777,000 |
|
In four to five years |
|
|
6,734,000 |
|
|
|
9,334,000 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,363,786,000 |
|
|
$ |
1,321,012,000 |
|
|
|
|
|
|
|
|
The following table depicts the maturity distribution for certificates of deposit with balances of
$100,000 or more at year-end:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Up to three months |
|
$ |
377,341,000 |
|
|
$ |
356,661,000 |
|
Three months to six months |
|
|
281,568,000 |
|
|
|
247,322,000 |
|
Six months to twelve months |
|
|
378,899,000 |
|
|
|
320,297,000 |
|
Over twelve months |
|
|
147,039,000 |
|
|
|
243,354,000 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,184,847,000 |
|
|
$ |
1,167,634,000 |
|
|
|
|
|
|
|
|
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 6 SHORT-TERM BORROWINGS
Information regarding securities sold under agreements to repurchase at year-end is summarized
below:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Outstanding balance at year-end |
|
$ |
94,413,000 |
|
|
$ |
97,465,000 |
|
Weighted average interest rate at year-end |
|
|
1.96 |
% |
|
|
2.94 |
% |
Average daily balance during the year |
|
|
93,149,000 |
|
|
|
88,685,000 |
|
Weighted average interest rate during the year |
|
|
2.04 |
% |
|
|
3.67 |
% |
Maximum month-end balance during the year |
|
|
105,986,000 |
|
|
|
102,881,000 |
|
Securities sold under agreements to repurchase (repurchase agreements) generally have original
maturities of less than one year. Repurchase agreements are treated as financings and the
obligations to repurchase securities sold are reflected as liabilities. Securities involved with
the repurchase agreements are recorded as assets of the Bank and are held in safekeeping by a
correspondent bank. Repurchase agreements are offered principally to certain large deposit
customers. Repurchase agreements were secured by securities with a market value of $106.5 million
and $108.1 million at year-end 2008 and 2007, respectively.
NOTE 7 FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Maturities January 2009 through December 2013, fixed
rates from
2.95% to 5.30%, averaging 3.79% |
|
$ |
270,000,000 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
Maturities January 2008 through January 2012, fixed rates from
4.01% to 5.34%, averaging 4.71% |
|
|
0 |
|
|
|
180,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
270,000,000 |
|
|
$ |
180,000,000 |
|
|
|
|
|
|
|
|
Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to
the maturity date. The advances are collateralized by residential mortgage loans, first mortgage
liens on multi-family residential property loans, first mortgage liens on commercial real estate
property loans, and substantially all other assets of the Bank, under a blanket lien arrangement.
Our borrowing line of credit as of December 31, 2008 totaled $316.5 million.
Maturities over the next five years are:
|
|
|
|
|
2009 |
|
$ |
70,000,000 |
|
2010 |
|
|
65,000,000 |
|
2011 |
|
|
85,000,000 |
|
2012 |
|
|
40,000,000 |
|
2013 |
|
|
10,000,000 |
|
(Continued)
F-51
NOTE 8 FEDERAL INCOME TAXES
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
The consolidated income tax (benefit) provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current expense (benefit) |
|
$ |
(3,318,000 |
) |
|
$ |
5,138,000 |
|
|
$ |
9,438,000 |
|
Deferred benefit |
|
|
(1,558,000 |
) |
|
|
(2,103,000 |
) |
|
|
(474,000 |
) |
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) |
|
$ |
(4,876,000 |
) |
|
$ |
3,035,000 |
|
|
$ |
8,964,000 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit for 2008 was more than, and income tax expense for 2007 and 2006 was less than,
the amount computed by applying the statutory federal income tax rate to income before income
taxes. The reasons for the difference are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory rates |
|
$ |
(3,442,000 |
) |
|
$ |
4,200,000 |
|
|
$ |
10,084,000 |
|
Increase (decrease) from |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest |
|
|
(818,000 |
) |
|
|
(794,000 |
) |
|
|
(795,000 |
) |
Bank owned life insurance |
|
|
(605,000 |
) |
|
|
(438,000 |
) |
|
|
(408,000 |
) |
Other |
|
|
(11,000 |
) |
|
|
67,000 |
|
|
|
83,000 |
|
|
|
|
|
|
|
|
|
|
|
Tax (benefit) expense |
|
$ |
(4,876,000 |
) |
|
$ |
3,035,000 |
|
|
$ |
8,964,000 |
|
|
|
|
|
|
|
|
|
|
|
The net deferred income tax asset recorded includes the following amounts of deferred income tax
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Deferred income tax assets |
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
$ |
9,488,000 |
|
|
$ |
9,035,000 |
|
Deferred loan fees |
|
|
263,000 |
|
|
|
111,000 |
|
Deferred compensation |
|
|
1,584,000 |
|
|
|
1,404,000 |
|
Nonaccrual loan interest income |
|
|
440,000 |
|
|
|
175,000 |
|
Fair value write-downs on foreclosed properties |
|
|
303,000 |
|
|
|
27,000 |
|
Other |
|
|
727,000 |
|
|
|
633,000 |
|
|
|
|
|
|
|
|
|
|
|
12,805,000 |
|
|
|
11,385,000 |
|
Deferred income tax liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
907,000 |
|
|
|
1,006,000 |
|
Unrealized gain on securities |
|
|
1,112,000 |
|
|
|
145,000 |
|
Net fair value of interest rate swaps |
|
|
666,000 |
|
|
|
0 |
|
Other |
|
|
674,000 |
|
|
|
713,000 |
|
|
|
|
|
|
|
|
|
|
|
3,359,000 |
|
|
|
1,864,000 |
|
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
9,446,000 |
|
|
$ |
9,521,000 |
|
|
|
|
|
|
|
|
SFAS No. 109, Accounting for Income Taxes, requires that companies assess whether a valuation
allowance should be established against their deferred tax assets based on the consideration of all
available evidence using a more likely than not standard. In accordance with SFAS No. 109, we
reviewed our deferred tax assets and determined that no valuation allowance was necessary at year
end 2008 or 2007. Despite the loss in 2008 and the challenging economic environment, we are in a
cumulative income position, have a history of strong earnings, are well-capitalized, and have
cautiously optimistic expectations regarding future taxable income. In making such judgments,
significant weight is given to evidence that can be objectively verified. In making decisions
regarding any valuation allowance, we consider both positive and negative evidence and analyze
changes in near-term market conditions as well as other factors which may impact future operating
results. The deferred tax assets will be analyzed quarterly for changes affecting realizability,
and there can be no guarantee that a valuation allowance will not be necessary in future periods.
(Continued)
F-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 8 FEDERAL INCOME TAXES (Continued)
We adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, on January 1, 2007. The adoption of FIN 48 had no affect on the financial
statements. We had no recognized tax benefits at any time during 2008 or 2007 and do not
anticipate any significant increase in unrecognized tax benefits during 2009. Should the accrual
of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy
to record such accruals in our income tax accounts; no such accruals existed at any time during
2008 or 2007. We file U.S. federal income tax returns which are subject to examination for all
years after 2004.
NOTE 9 STOCK-BASED COMPENSATION
Stock-based compensation plans are used to provide directors and employees with an increased
incentive to contribute to the long-term performance and growth of Mercantile, to align the
interests of directors and employees with the interests of Mercantiles shareholders through the
opportunity for increased stock ownership and to attract and retain directors and employees. From
1997 through 2005, stock option grants were provided to directors and certain employees through
several stock option plans, including the 1997 Employee Stock Option Plan, 2000 Employee Stock
Option Plan, 2004 Employee Stock Option Plan and Independent Director Stock Option Plan. During
the past three years, stock option and restricted stock grants were provided to certain employees
through the Stock Incentive Plan of 2006.
Under our 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan and 2004 Employee Stock
Option Plan, stock options granted to employees were granted at the market price on the date of
grant, generally fully vest after one year and expire ten years from the date of grant. Stock
options granted to non-executive officers during 2005 vested about three weeks after being granted.
Under our Independent Director Stock Option Plan, stock options granted to non-employee directors
are at 125% of the market price on the date of grant, fully vest after five years and expire ten
years from the date of grant. The Stock Incentive Plan of 2006 replaced all of our outstanding
stock option plans for stock options not previously granted. Under the Stock Incentive Plan of
2006, incentive awards may include, but are not limited to, stock options, restricted stock, stock
appreciation rights and stock awards. Incentive awards that are stock options or stock
appreciation rights are granted with an exercise price not less than the closing price of
Mercantile stock on the date of grant, or for stock options granted in 2006 or 2007, the day before
the date of grant, if the closing price was higher on the day before the date of grant. Price,
vesting and expiration date parameters are determined by Mercantiles Compensation Committee on a
grant-by-grant basis. Generally, the stock options granted to employees during the past three
years fully vest after two years and expire after seven years. The restricted stock awards granted
to certain employees during the past three years fully vest after four years. No payments were
required from employees for the restricted stock awards. At year-end 2008, there were
approximately 396,000 shares authorized for future incentive awards.
As of December 31, 2008, there was $0.2 million of total unrecognized compensation cost related to
unvested stock options granted under our various stock-based compensation plans. This unrecognized
compensation cost is expected to be recognized over a weighted-average period of 1.5 years. As of
December 31, 2008, there was $1.1 million of total unrecognized compensation cost related to
unvested restricted stock granted under our Stock Incentive Plan of 2006. The compensation cost is
expected to be recognized over a period of 3.0 years.
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 9 STOCK-BASED COMPENSATION (Continued)
A summary of restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at
beginning of year |
|
|
63,024 |
|
|
$ |
23.69 |
|
|
|
21,159 |
|
|
$ |
37.94 |
|
|
|
0 |
|
|
$ |
NA |
|
Granted |
|
|
56,710 |
|
|
|
6.21 |
|
|
|
44,450 |
|
|
|
17.74 |
|
|
|
21,159 |
|
|
|
37.94 |
|
Vested |
|
|
0 |
|
|
NA |
|
|
|
0 |
|
|
NA |
|
|
|
0 |
|
|
NA |
|
Forfeited |
|
|
(6,724 |
) |
|
|
24.83 |
|
|
|
(2,585 |
) |
|
|
37.94 |
|
|
|
0 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at
end of year |
|
|
113,010 |
|
|
$ |
14.85 |
|
|
|
63,024 |
|
|
$ |
23.69 |
|
|
|
21,159 |
|
|
$ |
37.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at
beginning of year |
|
|
271,755 |
|
|
$ |
24.34 |
|
|
|
288,962 |
|
|
$ |
24.07 |
|
|
|
330,378 |
|
|
$ |
20.77 |
|
Granted |
|
|
67,460 |
|
|
|
6.21 |
|
|
|
54,099 |
|
|
|
17.74 |
|
|
|
25,867 |
|
|
|
37.94 |
|
Exercised |
|
|
(2,000 |
) |
|
|
8.22 |
|
|
|
(52,117 |
) |
|
|
12.33 |
|
|
|
(64,971 |
) |
|
|
12.52 |
|
Forfeited or expired |
|
|
(11,781 |
) |
|
|
29.48 |
|
|
|
(19,189 |
) |
|
|
34.38 |
|
|
|
(2,312 |
) |
|
|
31.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
end of year |
|
|
325,434 |
|
|
$ |
20.49 |
|
|
|
271,755 |
|
|
$ |
24.34 |
|
|
|
288,962 |
|
|
$ |
24.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at year-end |
|
|
198,694 |
|
|
$ |
25.23 |
|
|
|
181,544 |
|
|
$ |
23.68 |
|
|
|
234,534 |
|
|
$ |
21.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option award is estimated on the date of grant using a closed option
valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected
volatilities are based on historical volatilities on our common stock. Historical data is used to
estimate stock option expense and post-vesting termination behavior. The expected term of stock
options granted is based on historical data and represents the period of time that stock options
granted are expected to be outstanding, which takes into account that the stock options are not
transferable. The risk-free interest rate for the expected term of the stock option is based on
the U.S. Treasury yield curve in effect at the time of the stock option grant.
The fair value of stock options granted was determined using the following weighted-average
assumptions as of grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.00 |
% |
|
|
3.40 |
% |
|
|
4.60 |
% |
|
|
|
|
Expected option life |
|
5 Years |
|
5 Years |
|
5 Years |
|
|
|
|
Expected stock price volatility |
|
|
44 |
% |
|
|
26 |
% |
|
|
26 |
% |
|
|
|
|
Dividend yield |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
(Continued)
F-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 9 STOCK-BASED COMPENSATION (Continued)
Options outstanding at year-end 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Exercisable |
|
|
|
|
|
|
Weighted Average |
|
Weighted |
|
|
|
|
|
Weighted |
Range of |
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Average |
Exercise |
|
|
|
|
|
Contractual |
|
Exercise |
|
|
|
|
|
Exercise |
Prices |
|
Number |
|
Life |
|
Price |
|
Number |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.00 - $8.00 |
|
|
67,460 |
|
|
6.9 Years |
|
$ |
6.21 |
|
|
|
0 |
|
|
$ |
NA |
|
$8.01 - $12.00 |
|
|
21,157 |
|
|
1.6 Years |
|
|
8.44 |
|
|
|
21,157 |
|
|
|
8.44 |
|
$12.01 - $16.00 |
|
|
27,736 |
|
|
2.8 Years |
|
|
12.89 |
|
|
|
27,736 |
|
|
|
12.89 |
|
$16.01 - $20.00 |
|
|
76,242 |
|
|
5.2 Years |
|
|
17.21 |
|
|
|
25,263 |
|
|
|
16.14 |
|
$20.01 - $24.00 |
|
|
7,632 |
|
|
3.8 Years |
|
|
20.18 |
|
|
|
7,632 |
|
|
|
20.18 |
|
$24.01 - $28.00 |
|
|
25,428 |
|
|
4.8 Years |
|
|
26.61 |
|
|
|
25,428 |
|
|
|
26.61 |
|
$32.01 - $36.00 |
|
|
72,987 |
|
|
6.3 Years |
|
|
34.77 |
|
|
|
72,987 |
|
|
|
34.77 |
|
$36.01 - $40.00 |
|
|
19,856 |
|
|
4.9 Years |
|
|
37.94 |
|
|
|
18,491 |
|
|
|
37.94 |
|
$40.01 - $44.00 |
|
|
6,936 |
|
|
5.8 Years |
|
|
40.28 |
|
|
|
0 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at year end |
|
|
325,434 |
|
|
5.3 Years |
|
$ |
20.49 |
|
|
|
198,694 |
|
|
$ |
25.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual life of the 198,694 stock options exercisable as of
December 31, 2008 was 4.6 years.
Information related to options outstanding at year-end 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum exercise price |
|
$ |
6.21 |
|
|
$ |
8.22 |
|
|
$ |
7.09 |
|
Maximum exercise price |
|
|
40.28 |
|
|
|
40.28 |
|
|
|
40.28 |
|
Average remaining option term |
|
5.3 Years |
|
5.9 Years |
|
6.1 Years |
Information related to stock option grants and exercises during 2008, 2007 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of stock options exercised |
|
$ |
13,000 |
|
|
$ |
1,019,000 |
|
|
$ |
1,616,000 |
|
Cash received from stock option exercises |
|
|
0 |
|
|
|
56,000 |
|
|
|
229,000 |
|
Tax benefit realized from stock option exercises |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Weighted average per share fair value of stock
options granted |
|
|
2.32 |
|
|
|
4.60 |
|
|
|
11.44 |
|
The closing price of our stock on December 31, 2008 was below the exercise price of all of our
stock option grants. Therefore, the aggregate intrinsic value of all stock options outstanding and
exercisable at December 31, 2008 was $0.
Shares issued as a result of the exercise of stock option grants have been authorized and unissued
shares.
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 10 RELATED PARTIES
Certain directors and executive officers of the Bank, including their immediate families and
companies in which they are principal owners, were loan customers of the Bank. At year-end 2008
and 2007, the Bank had $17.7 million and $19.1 million in loan commitments to directors and
executive officers, of which $14.1 million and $14.7 million were outstanding at year-end 2008 and
2007, respectively, as reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
14,719,000 |
|
|
$ |
8,797,000 |
|
New loans |
|
|
1,777,000 |
|
|
|
9,551,000 |
|
Repayments |
|
|
(2,406,000 |
) |
|
|
(3,629,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
14,090,000 |
|
|
$ |
14,719,000 |
|
|
|
|
|
|
|
|
Related party deposits and repurchase agreements totaled $12.7 million and $14.2 million at
year-end 2008 and 2007, respectively.
NOTE 11 COMMITMENTS AND OFF-BALANCE-SHEET RISK
We are a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit. Loan commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in
the contract. Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
These instruments involve, to varying degrees, elements of credit risk in excess of the amount
recognized, if any, in the balance sheet. Our maximum exposure to loan loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual
notional amount of those instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments. Collateral, such as accounts
receivable, securities, inventory, and property and equipment is generally obtained based on
managements credit assessment of the borrower. If required, estimated loss exposure resulting
from these instruments is expensed and recorded as a liability. The balance of the liability
account related to loan commitments was $0.5 million at year-end 2008 and 2007.
At year-end 2008 and 2007, the rates on existing off-balance sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing of the
counterparties.
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 11 COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
Our maximum exposure to credit losses for loan commitments and standby letters of credit
outstanding at year-end was as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Commercial unused lines of credit |
|
$ |
323,785,000 |
|
|
$ |
377,493,000 |
|
Unused lines of credit secured by 1 4 family
residential properties |
|
|
30,658,000 |
|
|
|
33,083,000 |
|
Credit card unused lines of credit |
|
|
9,413,000 |
|
|
|
9,035,000 |
|
Other consumer unused lines of credit |
|
|
4,881,000 |
|
|
|
6,910,000 |
|
Commitments to make loans |
|
|
10,959,000 |
|
|
|
66,196,000 |
|
Standby letters of credit |
|
|
51,439,000 |
|
|
|
81,292,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
431,135,000 |
|
|
$ |
574,009,000 |
|
|
|
|
|
|
|
|
Commitments to make loans generally reflect our binding obligations to existing and prospective
customers to extend credit, including line of credit facilities secured by accounts receivable and
inventory, and term debt secured by either real estate or equipment. In most instances, line of
credit facilities are for a one year term and are at a floating rate tied to the prime rate. For
term debt secured by real estate, customers are generally offered a floating rate tied to the prime
rate and a fixed rate currently ranging from 5.00% to 6.50%. These credit facilities generally
balloon within five years, with payments based on amortizations ranging from 10 to 25 years. For
term debt secured by non-real estate collateral, customers are generally offered a floating rate
tied to the prime rate and a fixed rate currently ranging from 5.00% to 7.00%. These credit
facilities generally mature and fully amortize within five years.
Certain of our commercial loan customers have entered into interest rate swap agreements directly
with our correspondent banks. To assist our commercial loan customers in these transactions, and
to encourage our correspondent banks to enter into the interest rate swap transactions with minimal
credit underwriting analyses on their part, we have entered into risk participation agreements with
the correspondent banks whereby we agree to make payments to the correspondent banks owed by our
commercial loan customers under the interest rate swap agreement in the event that our commercial
loan customers do not make the payments. We are not a party to the interest rate swap agreements
under these arrangements. As of December 31, 2008, the total notional amount of the underlying
interest rate swap agreements was $61.8 million, with a net fair value from our commercial loan
customers perspective of negative $8.0 million. Payments made during 2008 in regards to the risk
participation agreements totaled $16,000; however, we believe the affected customer will reimburse
us for such payments and therefore we have accrued no liability for these payments or such
potential future payments. These risk participation agreements are considered financial guarantees
in accordance with FASB Interpretation No. 45 and are therefore recorded as liabilities at fair
value, generally equal to the fees collected at the time of their execution. These liabilities are
accreted into income during the term of the interest rate swap agreements, generally ranging
from four to fifteen years. This liability totaled $0.3 million and $0.1 million at December 31,
2008 and 2007, respectively.
The following instruments are considered financial guarantees under FASB Interpretation No. 45.
These instruments are carried at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Contract |
|
|
Carrying |
|
|
Contract |
|
|
Carrying |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
51,439,000 |
|
|
$ |
282,000 |
|
|
$ |
81,292,000 |
|
|
$ |
357,000 |
|
We were required to have $0.3 million of cash on hand or on deposit with the Federal Reserve Bank
of Chicago to meet regulatory reserve and clearing requirements at year-end 2008 and 2007. These
balances do not earn interest.
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 12 BENEFIT PLANS
We have a 401(k) benefit plan that covers substantially all of our employees. Our 2008, 2007 and
2006 matching 401(k) contributions charged to expense were $781,000, $747,000 and $674,000,
respectively. The percent of our matching contributions to the 401(k) is determined annually by
the Board of Directors. The 401(k) benefit plan allows employee contributions up to 15% of their
compensation, which are matched at 100% of the first 5% of the compensation contributed up to a
maximum matching contribution for the 2008 plan year of $11,500. Matching contributions are
immediately vested.
We have a deferred compensation plan in which all persons serving on the Board of Directors may
defer all or portions of their annual retainer and meeting fees, with distributions to be paid upon
termination of service as a director or specific dates selected by the director. The deferred
amounts are categorized on our financial statements as other borrowed money. The deferred balances
are paid interest at a rate equal to the Wall Street Journal Prime Rate, adjusted at the beginning
of each calendar quarter. Interest expense for the plan during 2008, 2007 and 2006 was $89,000,
$109,000 and $81,000, respectively.
We have a non-qualified deferred compensation program in which selected officers may defer all or
portions of salary and bonus payments. The deferred amounts are categorized on our financial
statements as other borrowed money. The deferred balances are paid interest at a rate equal to the
Wall Street Journal Prime Rate, adjusted at the beginning of each calendar quarter. Interest
expense for the plan during 2008, 2007 and 2006 was $140,000, $190,000 and 148,000, respectively.
The Mercantile Bank Corporation Employee Stock Purchase Plan of 2002 (Stock Purchase Plan) is a
non-compensatory plan intended to encourage full- and part-time employees of Mercantile and its
subsidiaries to promote our best interests and to align employees interests with the interests of
our shareholders by permitting employees to purchase shares of our common stock through regular
payroll deductions. Shares are purchased on the last business day of each calendar quarter at a
price equal to the average, rounded to the nearest whole cent, of the highest and lowest sales
prices of our common stock reported on The Nasdaq Stock Market. Originally, 25,000 shares of
common stock may be issued under the Stock Purchase Plan; however, the number of shares has been
and may continue to be adjusted in the future to reflect stock dividends and other changes in our
capitalization. The numbers of shares issued under the Stock Purchase Plan totaled 10,904 and
3,966 in 2008 and 2007, respectively. As of December 31, 2008, there were 5,989 shares available
under the Stock Purchase Plan. Effective February 26, 2009, the Stock Purchase Plan was amended to
increase the number of shares that can be issued under the plan to 55,000 shares, subject to
adjustments.
NOTE 13 HEDGING ACTIVITIES
Our interest rate risk policy includes guidelines for measuring and monitoring interest rate risk.
Within these guidelines, parameters have been established for maximum fluctuations in net interest
income. Possible fluctuations are measured and monitored using net interest income simulation.
Our policy provides for the use of certain derivative instruments and hedging activities to aid in
managing interest rate risk to within policy parameters.
A majority of our assets are comprised of commercial loans on which the interest rates are
variable, while a majority of our liabilities are comprised of fixed rate certificates of deposit
and FHLB advances. Due to this repricing mismatch, we may periodically enter into derivative
financial instruments to mitigate the exposure in cash flows resulting from changes in interest
rates.
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 13 HEDGING ACTIVITIES (Continued)
During 2008, we entered into several interest rate swaps with an aggregate notional amount of
$275.0 million. The interest rate swaps qualified as cash flow hedges that converted the variable
rate cash inflows on certain of our prime-based commercial loans to a fixed rate of interest. The
interest rate swaps paid interest to us at stated fixed rates and required that we make interest
payments based on the average of the Wall Street Journal Prime Rate.
On October 30, 2008, we terminated all of our interest rate swaps. The termination coincided with
our decision to not lower our prime rate in association with the Federal Open Market Committees
reduction of the targeted federal funds rate by 50 basis points announced on October 29, 2008.
Virtually all of our prime-based commercial floating rate loans are tied to the Mercantile Bank
Prime Rate, while our interest rate swaps utilized the Wall Street Journal Prime Rate. The
resulting difference negatively impacted the effectiveness of our interest rate swaps, so we
believed it was prudent to terminate them. The aggregate fair value of the interest rate swaps on
October 30, 2008 was $2.4 million, which will be accreted into interest income on loans and leases
during the upcoming periods based on the original term of the interest rate swaps as follows:
$765,000 during the first quarter of 2009; $525,000 during the second quarter 2009; $250,000 during
the third and fourth quarters 2009; and $100,000 during the first quarter 2010.
NOTE 14 FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Values |
|
Values |
|
Values |
|
Values |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
25,804,000 |
|
|
$ |
25,804,000 |
|
|
$ |
29,430,000 |
|
|
$ |
29,430,000 |
|
Securities available for sale |
|
|
162,669,000 |
|
|
|
162,669,000 |
|
|
|
136,673,000 |
|
|
|
136,673,000 |
|
Securities held to maturity |
|
|
64,437,000 |
|
|
|
65,381,000 |
|
|
|
65,330,000 |
|
|
|
66,440,000 |
|
Federal Home Loan Bank stock |
|
|
15,681,000 |
|
|
|
15,681,000 |
|
|
|
9,733,000 |
|
|
|
9,733,000 |
|
Loans, net |
|
|
1,829,807,000 |
|
|
|
1,872,141,000 |
|
|
|
1,774,066,000 |
|
|
|
1,777,883,000 |
|
Bank owned life insurance policies |
|
|
42,462,000 |
|
|
|
42,462,000 |
|
|
|
39,118,000 |
|
|
|
39,118,000 |
|
Accrued interest receivable |
|
|
8,513,000 |
|
|
|
8,513,000 |
|
|
|
9,957,000 |
|
|
|
9,957,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,599,575,000 |
|
|
|
1,610,953,000 |
|
|
|
1,591,181,000 |
|
|
|
1,585,921,000 |
|
Securities sold under agreements
to repurchase |
|
|
94,413,000 |
|
|
|
94,413,000 |
|
|
|
97,465,000 |
|
|
|
97,465,000 |
|
Federal funds purchased |
|
|
0 |
|
|
|
0 |
|
|
|
13,800,000 |
|
|
|
13,800,000 |
|
Federal Home Loan Bank advances |
|
|
270,000,000 |
|
|
|
274,847,000 |
|
|
|
180,000,000 |
|
|
|
180,303,000 |
|
Subordinated debentures |
|
|
32,990,000 |
|
|
|
31,100,000 |
|
|
|
32,990,000 |
|
|
|
32,678,000 |
|
Accrued interest payable |
|
|
15,245,000 |
|
|
|
15,245,000 |
|
|
|
21,130,000 |
|
|
|
21,130,000 |
|
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 14 FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank
stock, accrued interest receivable and payable, bank owned life insurance policies, demand
deposits, securities sold under agreements to repurchase, and variable rate loans and deposits that
reprice frequently and fully. Security fair values are based on market prices or dealer quotes,
and if no such information is available, on the rate and term of the security and information about
the issuer. For fixed rate loans and deposits and for variable rate loans and deposits with
infrequent repricing or repricing limits, fair value is based on discounted cash flows using
current market rates applied to the estimated life and credit risk. Fair value of subordinated
debentures and Federal Home Loan Bank advances is based on current rates for similar financing.
Fair value of off balance sheet items is estimated to be nominal.
Current accounting pronouncements require disclosure of the estimated fair value of financial
instruments. Effective January 1, 2008, fair value is defined in accordance with SFAS No. 157 as
disclosed in Note 15. Given the current market conditions, a portion of our loan portfolio is not
readily marketable and market prices do not exist. We have not attempted to market our loans to
potential buyers, if any exist, to determine the fair value of those instruments in accordance with
the definition of SFAS No. 157. Since negotiated prices in illiquid markets depends upon the then
present motivations of the buyer and seller, it is reasonable to assume that actual sales prices
could vary widely from any estimate of fair value made without the benefit of negotiations.
Additionally, changes in market interest rates can dramatically impact the value of financial
instruments in a short period of time. Accordingly, the fair value measurements for loans included
in the table above are unlikely to represent the instruments liquidation values.
NOTE 15 FAIR VALUE MEASUREMENTS
Effective January 1, 2008, we implemented SFAS No. 157 relating to our financial assets and
liabilities. SFAS No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. A fair
value measurement assumes that the transaction to sell the asset or transfer the liability occurs
in the principal market for the asset or liability, or in the absence of a principal market, the
most advantageous market for the asset or liability. The price of the principal (or most
advantageous) market used to measure the fair value of the asset or liability shall not be adjusted
for transaction costs. An orderly transaction is a transaction that assumes exposure to the market
for a period prior to the measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets and liabilities; it is not a forced transaction.
Market participants are buyers and sellers in the principal market that are (i) independent, (ii)
knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS No. 157 requires the use of valuation techniques that are consistent with the market approach,
the income approach and/or the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash
flows or earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the assumptions market
participants would use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the reporting entitys own
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. In that regard, SFAS No.
157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 15 FAIR VALUE MEASUREMENTS (Continued)
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we
have the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; or other inputs that are observable or can be derived
from or corroborated by observable market data by correlation or other means.
Level 3: Significant unobservable inputs that reflect our own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
The following is a description of our valuation methodologies used to measure and disclose the fair
values of our financial assets and liabilities on a recurring or nonrecurring basis:
Securities available for sale. Securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices
are not available, fair values are measured using independent pricing models. Level 2 securities
include U.S. Government Agency bonds and mortgage-backed securities issued or guaranteed by U.S.
Government Agencies. We have no Level 1 or 3 securities.
Securities held to maturity. Securities held to maturity are carried at amortized cost when we have
the positive intent and ability to hold them to maturity. The fair value of held to maturity
securities, as disclosed in the accompanying consolidated financial statements, is based on quoted
prices, if available. If quoted prices are not available, fair values are measured using
independent pricing models.
Mortgage loans held for sale. Mortgage loans held for sale are carried at the lower of cost or fair
value and are measured on a nonrecurring basis. Fair value is based on independent quoted market
prices, where applicable, or the prices for other mortgage whole loans with similar
characteristics. As of December 31, 2008, we determined that the fair value of our mortgage loans
held for sale was similar to the cost; therefore, we carried the $1.1 million of such loans at cost
so they are not included in the nonrecurring table below.
Loans and leases. We do not record loans and leases at fair value on a recurring basis. However,
from time to time, we record nonrecurring fair value adjustments to collateral dependent loans and
leases to reflect partial write-downs or specific reserves that are based on the observable market
price or current estimated value of the collateral. These loans and leases are reported in the
nonrecurring table below at initial recognition of impairment and on an ongoing basis until
recovery or charge-off. At time of foreclosure or repossession, foreclosed and repossessed assets
are adjusted to fair value less costs to sell upon transfer of the loans and leases to foreclosed
and repossessed assets, establishing a new cost basis. At that time, they are reported in our fair
value disclosures related to nonfinancial assets.
Derivatives. For interest rate swaps, we measure fair value utilizing models that use primarily
market observable inputs, such as yield curves and option volatilities, and accordingly, are
classified as Level 2. We had no interest rate swap contracts outstanding as of December 31, 2008.
(Continued)
F-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 15 FAIR VALUE MEASUREMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of assets and liabilities measured at fair value on a recurring basis as of December
31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
$ |
162,669,000 |
|
|
$ |
0 |
|
|
$ |
162,669,000 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162,669,000 |
|
|
$ |
0 |
|
|
$ |
162,669,000 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had no assets or liabilities measured at Level 3 during 2008; however, in previous Form 10-Q
filings we indicated that our securities available for sale were measured at Level 1. We recently
re-reviewed documentation provided to us by our third party securities pricing vendor and
determined that the measurement tools utilized to determine the fair value of our securities more
closely reflects a Level 2 categorization than Level 1 as previously reported. There have been no
significant measurement methodology changes employed by our securities pricing vendor.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of
December 31, 2008 and related gains (losses) during 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Gains |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
(Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (1) |
|
$ |
37,197,000 |
|
|
$ |
0 |
|
|
$ |
37,197,000 |
|
|
$ |
0 |
|
|
$ |
(16,710,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,197,000 |
|
|
$ |
0 |
|
|
$ |
37,197,000 |
|
|
$ |
0 |
|
|
$ |
(16,710,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents carrying value and related write-downs and specific reserves for
which adjustments are based on the estimated value of the property. |
Nonfinancial Assets and Liabilities Subject to FSP FAS 157-2 Deferral Provisions
We will apply the fair value measurement and disclosure provisions of SFAS No. 157 effective on
January 1, 2009 to nonfinancial assets and liabilities measured on a nonrecurring basis. We
measure the fair value of the following on a nonrecurring basis: (1) long-lived assets and (2)
foreclosed and repossessed assets.
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 16 EARNINGS (LOSS) PER SHARE
The factors used in the earnings (loss) per share computation follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959,000 |
) |
|
$ |
8,966,000 |
|
|
$ |
19,847,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
8,470,721 |
|
|
|
8,453,483 |
|
|
|
8,403,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(0.59 |
) |
|
$ |
1.06 |
|
|
$ |
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959,000 |
) |
|
$ |
8,966,000 |
|
|
$ |
19,847,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for
basic earnings (loss) per common share |
|
|
8,470,721 |
|
|
|
8,453,483 |
|
|
|
8,403,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Dilutive effects of share-based awards |
|
|
0 |
|
|
|
44,255 |
|
|
|
114,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential
common shares |
|
|
8,470,721 |
|
|
|
8,497,738 |
|
|
|
8,517,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
(0.59 |
) |
|
$ |
1.06 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
Share-based awards for 438,444, 196,256 and 31,940 shares of common stock were not considered in
computing diluted earnings per common share for 2008, 2007 and 2006, respectively, because they
were antidilutive.
NOTE 17 SUBORDINATED DEBENTURES
The trust, a business trust formed by the company, was incorporated in 2004 for the purpose of
issuing Series A and Series B Preferred Securities. On September 16, 2004, the trust sold the
Series A Preferred Securities in a private sale for $16.0 million, and also sold $495,000 of Series
A Common Securities to Mercantile. The proceeds of the Series A Preferred Securities and the
Series A Common Securities were used by the trust to purchase $16,495,000 of Series A Floating Rate
Notes that were issued by Mercantile on September 16, 2004. Mercantile used the proceeds of the
Series A Floating Rate Notes to finance the redemption on September 17, 2004 of the $16.0 million
of 9.60% Cumulative Preferred Securities issued in 1999 by MBWM Capital Trust I. On December 10,
2004, the trust sold the Series B Preferred Securities in a private sale for $16.0 million, and
also sold $495,000 of Series B Common Securities to Mercantile. The proceeds of the Series B
Preferred Securities and the Series B Common Securities were used by the trust to purchase
$16,495,000 of Series B Floating Rate Notes that were issued by Mercantile on December 10, 2004.
Substantially all of the net proceeds of the Series B Floating Rate Notes were contributed to our
bank as capital to provide support for asset growth, fund investments in loans and securities and
for general corporate purposes.
The only significant assets of the trust are the Series A and Series B Floating Rate Notes, and the
only significant liabilities of the trust are the Series A and Series B Preferred Securities. The
Series A and Series B Floating Rate Notes are categorized on our consolidated balance sheets as
subordinated debentures and the interest expense is recorded on our consolidated statements of
income under interest expense on long-term borrowings.
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 18 REGULATORY MATTERS
Mercantile and the Bank are subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct material effect on the
financial statements.
The prompt corrective action regulations provide five classifications, including well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If
an institution is not well capitalized, regulatory approval is required to accept brokered
deposits. Subject to limited exceptions, no institution may make a capital distribution if, after
making the distribution, it would be undercapitalized. If an institution is undercapitalized, it
is subject to being closely monitored by its principal federal regulator, its asset growth and
expansion are restricted, and plans for capital restoration are required. In addition, further
specific types of restrictions may be imposed on the institution at the discretion of the federal
regulator. At year-end 2008 and 2007, the most recent regulatory notifications categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that we believe has changed the Banks category.
At year end, actual capital levels (in thousands) and minimum required levels for Mercantile and
the Bank were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to be Well |
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
for Capital |
|
Prompt Corrective |
|
|
Actual |
|
Adequacy Purposes |
|
Action Regulations |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk
weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
229,307 |
|
|
|
10.9 |
% |
|
$ |
167,836 |
|
|
|
8.0 |
% |
|
$ |
NA |
|
|
NA |
Bank |
|
|
226,034 |
|
|
|
10.8 |
|
|
|
167,480 |
|
|
|
8.0 |
|
|
|
209,350 |
|
|
|
10.0 |
% |
Tier 1 capital (to risk
weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
203,072 |
|
|
|
9.7 |
|
|
|
83,918 |
|
|
|
4.0 |
|
|
NA |
|
|
NA |
Bank |
|
|
199,853 |
|
|
|
9.6 |
|
|
|
83,740 |
|
|
|
4.0 |
|
|
|
125,610 |
|
|
|
6.0 |
|
Tier 1 capital (to average
assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
203,072 |
|
|
|
9.2 |
|
|
|
88,577 |
|
|
|
4.0 |
|
|
NA |
|
|
NA |
Bank |
|
|
199,853 |
|
|
|
9.0 |
|
|
|
88,413 |
|
|
|
4.0 |
|
|
|
110,516 |
|
|
|
5.0 |
|
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 18 REGULATORY MATTERS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to be Well |
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
for Capital |
|
Prompt Corrective |
|
|
Actual |
|
Adequacy Purposes |
|
Action Regulations |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk
weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
235,700 |
|
|
|
11.4 |
% |
|
$ |
165,562 |
|
|
|
8.0 |
% |
|
$ |
NA |
|
|
NA |
Bank |
|
|
232,435 |
|
|
|
11.3 |
|
|
|
165,292 |
|
|
|
8.0 |
|
|
|
206,615 |
|
|
|
10.0 |
% |
Tier 1 capital (to risk
weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
209,886 |
|
|
|
10.1 |
|
|
|
82,781 |
|
|
|
4.0 |
|
|
NA |
|
|
NA |
Bank |
|
|
206,621 |
|
|
|
10.0 |
|
|
|
82,646 |
|
|
|
4.0 |
|
|
|
123,969 |
|
|
|
6.0 |
|
Tier 1 capital (to average
assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
209,886 |
|
|
|
10.0 |
|
|
|
84,169 |
|
|
|
4.0 |
|
|
NA |
|
|
NA |
Bank |
|
|
206,621 |
|
|
|
9.8 |
|
|
|
84,061 |
|
|
|
4.0 |
|
|
|
105,076 |
|
|
|
5.0 |
|
Federal and state banking laws and regulations place certain restrictions on the amount of
dividends the Bank can transfer to Mercantile and on the capital levels that must be maintained.
At year-end 2008, under the most restrictive of these regulations (to remain well capitalized), the
Bank could distribute approximately $12.0 million to Mercantile as dividends without prior
regulatory approval.
The capital levels as of year-end 2008 and 2007 include $32.0 million of trust preferred securities
issued by the trust in September 2004 and December 2004 subject to certain limitations. Under
applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core
capital element. The guidelines provide that the aggregate amount of restricted core elements that
may be included in Tier 1 capital must not exceed 25% of the sum of all core capital elements,
including restricted core capital elements, net of goodwill less any associated deferred tax
liability. At year-end 2008 and 2007, all $32.0 million of the trust preferred securities were
included as Tier 1 capital of Mercantile.
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 19 OTHER COMPREHENSIVE INCOME
Other comprehensive income components, other than net income (loss), and related taxes were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Unrealized holding gains on
available-for-sale securities |
|
$ |
2,761,000 |
|
|
$ |
2,110,000 |
|
|
$ |
470,000 |
|
Change in net fair value of interest rate swaps |
|
|
2,876,000 |
|
|
|
0 |
|
|
|
0 |
|
Reclassification adjustments for gains
later recognized in income |
|
|
(974,000 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains |
|
|
4,663,000 |
|
|
|
2,110,000 |
|
|
|
470,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of unrealized holding gains
on available-for-sale securities and
unrealized gain on interest rate swaps |
|
|
(1,973,000 |
) |
|
|
(739,000 |
) |
|
|
(164,000 |
) |
Tax effect of reclassification adjustments for
gains later recognized in income |
|
|
341,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
3,031,000 |
|
|
$ |
1,371,000 |
|
|
$ |
306,000 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of tax, consists of a net unrealized gain on
available-for-sale securities of $2,064,000 and a fair value of interest rate swaps of $1,236,000
at December 31, 2008. At December 31, 2007, accumulated other comprehensive income, net of tax,
consists of a net unrealized gain on available-for-sale securities totaling $269,000.
NOTE 20 QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Net Interest |
|
|
Net |
|
|
Earnings (Loss) per Share |
|
|
|
Income |
|
|
Income |
|
|
Income (Loss) |
|
|
Basic |
|
|
Diluted |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
31,955,000 |
|
|
$ |
11,383,000 |
|
|
$ |
(3,738,000 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.44 |
) |
Second quarter |
|
|
29,139,000 |
|
|
|
10,592,000 |
|
|
|
(2,612,000 |
) |
|
|
(0.31 |
) |
|
|
(0.31 |
) |
Third quarter |
|
|
29,843,000 |
|
|
|
11,728,000 |
|
|
|
1,079,000 |
|
|
|
0.13 |
|
|
|
0.13 |
|
Fourth quarter |
|
|
30,134,000 |
|
|
|
12,505,000 |
|
|
|
313,000 |
|
|
|
0.04 |
|
|
|
0.04 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
36,025,000 |
|
|
$ |
14,484,000 |
|
|
$ |
4,283,000 |
|
|
$ |
0.51 |
|
|
$ |
0.51 |
|
Second quarter |
|
|
36,084,000 |
|
|
|
13,948,000 |
|
|
|
2,221,000 |
|
|
|
0.26 |
|
|
|
0.26 |
|
Third quarter |
|
|
36,779,000 |
|
|
|
14,051,000 |
|
|
|
2,367,000 |
|
|
|
0.28 |
|
|
|
0.28 |
|
Fourth quarter |
|
|
35,293,000 |
|
|
|
13,074,000 |
|
|
|
95,000 |
|
|
|
0.01 |
|
|
|
0.01 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
31,099,000 |
|
|
$ |
15,099,000 |
|
|
$ |
4,929,000 |
|
|
$ |
0.59 |
|
|
$ |
0.58 |
|
Second quarter |
|
|
33,746,000 |
|
|
|
15,646,000 |
|
|
|
5,111,000 |
|
|
|
0.61 |
|
|
|
0.60 |
|
Third quarter |
|
|
35,675,000 |
|
|
|
15,547,000 |
|
|
|
5,202,000 |
|
|
|
0.62 |
|
|
|
0.61 |
|
Fourth quarter |
|
|
36,740,000 |
|
|
|
15,295,000 |
|
|
|
4,605,000 |
|
|
|
0.54 |
|
|
|
0.54 |
|
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 21 MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements:
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
407,000 |
|
|
$ |
2,137,000 |
|
Investment in bank subsidiary |
|
|
203,153,000 |
|
|
|
206,890,000 |
|
Other assets |
|
|
4,396,000 |
|
|
|
3,373,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
207,956,000 |
|
|
$ |
212,400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
$ |
594,000 |
|
|
$ |
1,255,000 |
|
Subordinated debentures |
|
|
32,990,000 |
|
|
|
32,990,000 |
|
Shareholders equity |
|
|
174,372,000 |
|
|
|
178,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
207,956,000 |
|
|
$ |
212,400,000 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
4,739,000 |
|
|
$ |
7,291,000 |
|
|
$ |
6,440,000 |
|
Other |
|
|
0 |
|
|
|
19,000 |
|
|
|
73,000 |
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
4,739,000 |
|
|
|
7,310,000 |
|
|
|
6,513,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,914,000 |
|
|
|
2,512,000 |
|
|
|
2,429,000 |
|
Other operating expenses |
|
|
2,431,000 |
|
|
|
2,835,000 |
|
|
|
1,917,000 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
4,345,000 |
|
|
|
5,347,000 |
|
|
|
4,346,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit and equity in
undistributed net income (loss) of subsidiary |
|
|
394,000 |
|
|
|
1,963,000 |
|
|
|
2,167,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax benefit |
|
|
(1,417,000 |
) |
|
|
(1,783,000 |
) |
|
|
(1,392,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (loss) of subsidiary |
|
|
(6,770,000 |
) |
|
|
5,220,000 |
|
|
|
16,288,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959,000 |
) |
|
$ |
8,966,000 |
|
|
$ |
19,847,000 |
|
|
|
|
|
|
|
|
|
|
|
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE 21 MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,959,000 |
) |
|
$ |
8,966,000 |
|
|
$ |
19,847,000 |
|
Adjustments to reconcile net income (loss) to net
cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed (income) loss of subsidiary |
|
|
6,770,000 |
|
|
|
(5,220,000 |
) |
|
|
(16,288,000 |
) |
Stock-based compensation expense |
|
|
654,000 |
|
|
|
361,000 |
|
|
|
242,000 |
|
Change in other assets |
|
|
(1,023,000 |
) |
|
|
(483,000 |
) |
|
|
9,000 |
|
Change in other liabilities |
|
|
(661,000 |
) |
|
|
648,000 |
|
|
|
73,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
779,000 |
|
|
|
4,272,000 |
|
|
|
3,883,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net capital investment into subsidiaries |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, net |
|
|
0 |
|
|
|
56,000 |
|
|
|
229,000 |
|
Employee stock purchase plan |
|
|
76,000 |
|
|
|
91,000 |
|
|
|
107,000 |
|
Dividend reinvestment plan |
|
|
40,000 |
|
|
|
76,000 |
|
|
|
98,000 |
|
Cash dividends |
|
|
(2,625,000 |
) |
|
|